Whether you’re a private equity professional, acquisition entrepreneur, or any other professional investor, you understand the need to measure every dollar in a business and make sound, strategic, data-driven investment and operational decisions.

And if you’re looking to grow and scale a business, one of your primary concerns is human capital. How are you getting the right people on your team? How are you growing the team? How are you getting the best possible performance from your team?

In our opinion as benefits consultants, you should strongly consider the role benefits play in attracting people to your business and keeping them content and motivated over time. The labor market is too competitive nowadays for a motivated company to just check the box to say “Yes, we offer benefits.”

Rather, your benefits have to differentiate your company and play a key role in your value proposition to prospective hires, particularly high-leverage executives and leaders who you are courting.

Investors are looking for opportunities to create value. You need to grow and scale your portfolio companies. And your benefits are an untapped resource for accomplishing both of these goals in order to create greater value for your investors and fund.

Benefits like health insurance are a cost on your PnL and play a key role in your ability to recruit and retain talented people. Each individual portfolio company may purchase health insurance, other benefits, and related human capital resources individually. But by relying on each individual company to make these decisions, an investor can miss a great value creation opportunity.

This is because vetting, selecting, implementing, and administering these benefits and vendors all take time and effort away from the company’s core business. Additionally, larger employers have access to better benefits as they increase in size.

Instead, we believe investors should rely on a human capital advisor or benefits consultant who can bring scale and turnkey solutions to the table for private equity investors.

The benefits of an integrated benefits approach for your portfolio companies include lower health insurance costs, lower recruiting expenses, and greater retention and team performance.

Lower Spending on Vendors and Insurance

Employee benefits, insurance, and any other personnel-related vendors all benefit from scale. In most cases, you can lower your variable costs if you can put more lives on plans and with vendors.

It’s important to understand this: Savings on employee benefits expenses lead to a direct increase in asset EBITDA.

Consider a simple example with 5 portfolio companies with 50 employees each. The low-hanging fruit in this example is the cost of your payroll vendor.

Each company may have a $12 PEPM (per employee per month) payroll cost, while an integrated payroll solution could cost $8 PEPM. There are also compliance and administrative benefits to having a centralized system across various companies.

This is an easy solution and carries additional benefits to compliance and other areas of risk management. But the big savings opportunity for private equity investors is in health insurance costs.

Increase Asset Value with Lower Health Insurance Spending

Each portfolio company is likely already purchasing small group health insurance. An integrated health insurance pool could reduce costs by 10 to 20% and minimize cost growth over time. When you consider that typical health insurance increases are 8%+ per year and run six- and seven-figures for most companies, this quickly becomes a great opportunity within your portfolio of assets.

If each portfolio company were to save 10% on health insurance premiums, and we assume a $10,000 PEPY expense, then we can unlock up to $250,000 in savings per year or $50,000 per company. If we assume a five times multiple on earnings, then we would’ve created $1.25M in value across this portfolio of assets by introducing a better health insurance plan. Then, we realize greater value over time if we can generate a lower per year trend in health insurance premiums. After 5 years, this could equate to $10M in value creation.

A smarter health insurance strategy not only improves a company’s financial health with immediate cost savings but also increases the future valuation of that company when it is sold due to increasing EBITDA.

And not only can we unlock savings through better health insurance, but we can also enhance the benefits at portfolio companies and further their growth strategies.

Make Benefits Another Competitive Advantage in your Fund

Stronger benefits help you recruit the top people in your field, poach talent from competitors, and reduce employee turnover.

When it comes to benefits, greater scale means you can purchase more accessible and affordable health care. This includes stronger virtual health options, reduced costs for prescription drugs, and other cost containment solutions like Direct Contracting and Centers of Excellence.

One reason for this is that each company may have little to no insight into its clinical data. By rolling these groups together, you and your benefits consultant can make more strategic decisions that impact your bottom line and enhance benefits at each of your companies. An example is finding high-cost claimants in your group and guiding them to cost-effective, quality care. Doing so increases the value of their benefits to them, reduces lost productivity, and saves dollars from your bottom line.

You probably understand the costs and opportunities for each of these areas in your companies. With better benefits, your companies can more easily attract and retain workers to scale growth and reduce labor costs like recruiting expenses. You can go after the top talent at competitors and win them over to your organization. And by retaining employees, you reduce the costs involved with high employee turnover that can plague companies.

Better benefits are a competitive advantage for the companies that make them a strategic priority. This is especially true nowadays in our current shift to greater remote work and hybrid work schedules. Employees perceive enhanced value from benefits that emphasize quality family benefits, innovative resources like virtual health and reduced prescription drug costs, among other areas.

Use the math above to do some quick math on what kind of value this can deliver to your own assets.

Click here to speak with a consultant about ways to make benefits a competitive advantage with your portfolio companies.

Posted by John Hansbrough in Behavioral Health, Business Strategies, Compliance, Digital Health, Direct Contracting, Employee Benefits, Health Insurance, Healthcare Innovation, Healthcare Spending, Human Resources, Mental Health, Prescription Drugs, Self-Funding, Telehealth