As a private equity fund, independent sponsor, individual buyer, family office, mezzanine investor or another type of investor, common ownership can be leveraged in the purchasing of health insurance.
If you are a common owner of a portfolio of businesses or a private equity (PE) investor – taking a close look at your employee health insurance strategy overall can drive down your risk and costs.
It is important to leverage the volume (population) of the entire portfolio, stratify your claims risk across more employees and hence, reduce your overall cost. This approach of building a portfolio health insurance “program” takes on a more macro-view of health insurance and can be extremely beneficial to investors.
Taking on this strategy creates many benefits for a portfolio, among which are the following:
- All of the portfolio companies can be viewed under a single microscope: which allows the PE buyer to see where costs are increasing and where opportunity lies more clearly among the portfolio.
- Budgeting can be done across the entire portfolio: Rather than wondering what renewals 10 different carriers will hand out in a given year, limiting the number of carriers to a smaller consistent group will allow the Private Equity Group (PEG) to project costs with more accuracy.
- Eligible and enrolled lives on the plans increases with the volume of the portfolio: Typically, underwriters view companies in terms of people enrolled in the medical plan. Companies are either <100 enrolled or >100 enrolled. Less than 100 enrolled companies only have access to state-filed rates, the companies do not gain access to their claims data, customized plans or have (any) negotiating power. Greater than 100 enrolled is the opposite, plans can be customized, and rates can be negotiated largely because claims data is available to the Company.
- Having five 20 enrolled companies with different carriers compared to a commonly owned group of 100 enrolled with a single carrier can create a material difference in cost.
How Does It Work?
Historically, portfolio programs were “risk pools,” creating a single fully-insured plan (or group of plan options) that all of the portfolio companies would feed into. Essentially PEG would have PEG Health Plan and portfolio company (portco) 1, 2, 3, 4…..etc. would all be members of that plan. Although this can be an effective approach, the trouble lies at exit. If portco 1 is a member of PEG Plan, when they are sold that portco must now become the plan sponsor of a new plan – the pool does not transfer with the selling entity post-closing. Therefore, the portco’s plan costs will inevitably increase upon exit as they do not have the support of the pool.
We have adapted to this issue and created more of an “umbrella” approach. Placing the PEG and their portfolio companies under a single carrier (or small group of carriers) will create a block of business or an umbrella, however the individual portcos will be their own plan sponsors from the start – not under a single plan sponsor. Therefore, the volume of the block of business can be leveraged during underwriting – however, upon exit the portco will assume the same plan they had pre-closing. This creates a much cleaner exit. Additionally, if a portfolio company would benefit from self-insuring rather than fully-insuring, this gives the PEG the flexibility to move portcos in an out of the block without throwing off the pool.
Most Private Equity clients of ours steer away from self-insuring given the risk of run-out claims after exit. When I portfolio company exits the portfolio, it is important to most investors that there is a clean break, with no risk of future liability from past or future claims. There is a possibility of claims run-out when self-insuring a portfolio company if a transaction occurs before the end of the plan year.
However, that does not mean self-insurance should be shunned forever in the world of PE. If the PEG has a general idea of the holding period of a specific group and they meet the size criteria for a self-insured group, self-insurance has its benefits and can be a major cost-reducer. Additionally, with self-insurance the opportunity for captives comes into play – a much more popular option in recent years as health insurance cost trends seem to exponentially increase. Captives are a larger pool of similar risk companies that are self-insuring while stratifying their risk over the entire captive. Captive programs enable employers to combine employees claims experience with other like-minded businesses to control medical insurance costs
If you are an owner of a portfolio of businesses or a private equity (PE) investor and want to investigate your options to provide your portfolio with the least amount of risk and most cost benefit, Oswald’s Private Equity Team has expertise in the area of health insurance/employee benefits. We work with our clients to make informed decisions and create an individualized plan that is backed by data, analysis and market information. We serve over 2,000 clients nationally and are among the largest privately held, employee-owned and independent brokerages in the country.
For more information on alternative risk and captives – https://www.oswaldcompanies.com/risk-hubs/alternative-risk-captives-and-programs
For more information on employee benefits – https://www.oswaldcompanies.com/employee-benefits/
Brian Stovsky is Business Development Leader, Private Equity, Oswald Companies
Brian Stovsky 