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By Brian Stovsky

Every private equity investor and common owner of a portfolio of businesses asks the same question: How can I lower my costs? The answer: Employees.

Your employee population is a valuable resource in saving money. You’re already providing benefits to this group, so consider combining them into one health insurance pool, which can spread out risk and, therefore, cut costs.

This macro view of health insurance benefits the portfolio in several ways.

• All the portfolio companies (portco) can be viewed under a single microscope. This enables the private equity buyer to see where costs are increasing and where opportunity lies.
• Budget across the entire portfolio. Limit the number of carriers you consider each year. This will allow for a more accurate prediction of costs.
• Higher volume = more negotiating power: Typically, underwriters view companies in terms of people enrolled in the medical plan. Companies either enroll less than or more than 100 people. When more than 100 people are enrolled, plans can be customized and rates can be negotiated.

How Does It Work?

Historically, portfolio programs were risk pools, that all the portfolio companies would feed into. While this approach can be effective, it comes with challenges. Luckily, you have options and Oswald can help.

The private equity group and its portfolio companies can be placed under one umbrella, covered by one carrier, which creates more buying power and loosens the rules for those in the group to make changes. However, the individual portfolio companies  will be their own plan sponsors. For example, if a portfolio company would benefit from self-insuring rather than fully insuring, this strategy gives the private equity group the flexibility to move its companies in and out of the block without throwing off the pool.

Making a Clean Break

Being able to make a clean break is important because there is no risk of future liability from past or future claims.

However, that does not mean self-insurance should be shunned in the world of M&A. Self-insurance can be beneficial if the private equity group has a general idea of the holding period of a specific group and they meet the size criteria for a self-insured group. It could lead to significant cost savings..

Additionally, with self-insurance the opportunity for captives comes into play – a much more popular option in recent years as health insurance costs 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.

All private equity investors should explore the options around their health insurance strategy. Oswald’s Private Equity Team can help. Since 2005, we have worked with our private equity clients to make informed decisions and create an individualized plan that is backed by data, analysis and market information.

Oswald serves over 2,000 clients nationally and are among the largest privately held, employee-owned and independent brokerages in the country.