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» Health Insurance and Benefits Strategies for Investors, Entrepreneurs, and Private Equity Firms

August 15, 2023

Business Strategies, Captives, Compliance, Employee Benefits, Employee Experience, Health Insurance, Healthcare Spending, Human Resources, Payroll, Self-Funding

Health insurance and benefits are often an untapped source of value creation for entrepreneurs, private equity professionals, and investors.

Entrepreneurs and private equity companies are in the business of creating value. This generally means they manage their companies in a way to increase revenue, decrease costs, and generally increase their value. Since a business increases its value based on its earnings, margin, and multiple, we can add significant value to an entrepreneur or investor by enhancing benefits, decreasing costs, and helping a company be more competitive in its market.

To put it simply, when we save $1 in expenses, we then increase EBITDA by $1, which increases the value of that company based on the multiple it gets on its earnings.

Let’s say we save a company $100,000 in benefits costs for the year and the company has an 8x multiple on earnings – this means we have added $800,000 in value to the company. Now extrapolate this across a portfolio of companies, and you can see the real opportunity in front of investors and entrepreneurs.

Here are a few strategies you can use as an entrepreneur, private equity professional, or investor with your companies.

  • Pool risks for better and lower-cost insurance
  • Offer better benefits to increase retention, improve recruiting, enhance productivity, and reduce absenteeism
  • Purchase from vendors with scale
  • Better manage compliance with technology and oversight

Let’s explore each in greater detail!

Pool Risks for Better & Lower-Cost Insurance

Insurance is a numbers game. With health insurance, more members on a plan allow us to better spread out the risk of a large claim. With commercial insurance, you can similarly spread out the risk of a claim. So if you have 5 companies with 50 people, why not pool them together to have the dynamics of a 250-employee company?

When we do this, we can negotiate better rates with carriers and unlock alternative funding strategies like captives and self-funding, which have a noticeable impact on year-over-year benefits expenses and claims management. We can use these larger risk pools to enhance the quality of benefits offered, which has other benefits for employers and investors.

Offer Better Benefits to Reduce Turnover and Support Employees

Quality benefits are a key aspect of growing and maximizing a business. Employees stay for good benefits and good benefits can attract the talent you need in your business. Benefits support employees and their families; if employees can’t access quality healthcare, they may stay home more often or be less productive at work.

If we take a wide-angle view of the organizational chart when it comes to benefits, we see a few key trends.

First, all employees care about how much they pay per paycheck and how much it costs to see a doctor. Copays and paycheck deductions trump all other concerns when it comes to healthcare. Networks do matter, but employees care about their wallets first and foremost. You can undertake a little financial engineering across your portfolio companies to offer less expensive benefits and make a big difference in turnover and retention.

Second, you can use benefits savings and scale to offer enhanced benefits for the key people in your organizations, such as executive benefits like disability and life insurance programs. This is particularly important when it comes to retention since these are the people most companies can least afford to lose and replace. We can design executive benefits programs with higher coverage amounts and better policy language when we have more executives included in the plan.

Purchase with Scale

Insurance is not the only business expense that benefits from scale. Other services include payroll, systems, technology, and other administrative expenses. When we bring a group to a vendor like a payroll company, we can negotiate lower per-employee-per-month costs with a larger employee pool.

Your insurance partners like commercial insurance producers or benefits consultants are very knowledgeable about areas of your business beyond insurance. If you’re shopping around for new vendors for any business service, always check in with your insurance professional!

Streamline Compliance and Reduce Administrative Burden

Along the lines of purchasing business services with scale, you should also consider consolidating compliance and other administrative services and responsibilities. Many mandates and laws at the local, state, and federal levels revolve around the number of employees in an organization. Take the ACA, for example, which considers commonly owned businesses a controlled group and therefore must be combined when it comes to health insurance.

Compliance and administrative service can be burdensome to manage company by company. Alternatively, a consolidated approach can nip any issues early on and streamline operations for each individual company.

Consolidate Services Across Your Portfolio to Drive Value

If you’re pursuing ownership of multiple businesses, you probably already have a thesis for how you are going to create value across your portfolio. We strongly recommend that you also consider how you can consolidate your insurance, benefits, and administrative services to reduce expenses and support the growth of your businesses.

If you’d like to have a complimentary discussion with one of our consultants about how to drive value across your enterprises, click here!

Posted by in Business Strategies, Captives, Compliance, Employee Benefits, Employee Experience, Health Insurance, Healthcare Spending, Human Resources, Payroll, Self-Funding