Cost control

This interview originally appeared in the September 2009 Private Equity Manager Monthly, a monthly printer-friendly publication delivered to subscribers to Private Equity Manager.

With a growing number of firms seeking to provide cost-cutting resources to their portfolio companies, a new health programme designed by The Blackstone Group marks a major step in the institutionalisation of private equity.

Blackstone projects that the programme, Equity Healthcare, will save up to $50 million this year by combining the purchasing power of a consortium of portfolio companies. Blackstone won’t be the only firm to benefit – other private equity firms can join Equity Healthcare for a cost of $2.25 per employee per month. TPG was the first private equity firm to join the group, and at least half a dozen other firms have expressed an interest.

The programme was created by Dr. Alan Muney, who was brought on board in 2007 to lead the effort across the firm’s 52 portfolio companies. Muney brought with him years of experience as a former executive vice president and chief medical officer of Oxford Health Plans and chief medical officer of UnitedHealthcare of the Northeast region. Muney spoke with PE Manager about how the programme was designed and how it is intended to reduce costs for its clients:

What were some of the major drivers of this initiative?
With health care costs plaguing employers and employees across the US for quite some time, Blackstone undertook an effort to study how it might tackle the issue across its portfolio companies. This issue came to a head when Blackstone CEO and co-founder, Stephen Schwarzman attended a conference and listened to corporate CFOs loudly complaining about health care costs. Blackstone then stepped up its efforts to establish a group purchasing platform that would leverage the collective employee base of its portfolio companies. They hired me to put together an initiative that became Equity Healthcare.

I used our aggregated purchasing power to negotiate two market-leading contracts with national payers, Aetna and Anthem Blue Cross and Blue Shield. My terms were simple: we wanted the highest level of customer service and care management staffing possible and wanted staffing teams exclusively dedicated to Equity Healthcare. Dedicated units are usually only available to a Fortune 10 national employer. Our providers also had to deliver a “medical cost trend target” that was significantly below what was predicted for the market – in essence, commit that the program would lower overall medical claims.

The only way to actually lower healthcare costs is to improve the medical claims costs which are coming from chronically ill members. Half the costs at every single company come from just three to five percent of its employees. So, to meaningfully lower claim costs, you have to focus on improving the care delivered to this population.

With TPG joining, how big is the programme so far?
We now have 28 companies and 125,000 employees, which when you include dependents, is roughly 260,000 members. The company sizes range from 800 to 20,000 employees and they are across all the differentsectors, from manufacturing to hospitality to retail. The fee ($2.25 per employee per month) is the same for everyone. As we get more companies and employees in, since we are running this basically at cost, it’s likely that the fee goes down as we get larger or we add a service in that that the majority of the portfolio companies think would be a value-add with that fee.

What kind of operational and administrative work goes into moving these companies into the programme?
Equity Healthcare performs a complete set of analytics for the portfolio company and their benefits consultants to review. We involve the CFO and CHRO from the very beginning, as opposed to simply the benefits manager so that the company has a full understanding of the value proposition. When a company joins Equity Healthcare, they maintain decision-making over their own benefit design and they can remain in Equity Healthcare even after their private equity investment ends.

How have you come up with your projected savings estimates?
We project a targeted claims saving of 3 to 5 percent savings per member company. Additionally, Aetna and Anthem have to beat a target medical trend rate for each portfolio company. We have a financial model with Aetna and Anthem that creates aligned incentives for them to work very collaboratively with Equity Healthcare to beat this target trend on behalf of each portfolio company.