Costs of living

With the battle over health care reform showing no signs of ending in the US, the issue of how to control health costs for both individuals and the companies that employ them has been receiving renewed focus, especially in the private equity industry.

For instance, last year Blackstone began allowing other private equity firms to join its Equity Healthcare programme which aggregates the purchasing power of portfolio companies to secure discounts in healthcare insurance. Meanwhile, one health insurer that has already been ahead of this trend is UnitedHealthcare, which created a private equity practice in 2005 to cater to firms and their portfolio companies.

Among other services, the company offers a benefit cost assessment of portfolio companies pre- and post-transaction and strategies to deliver cost savings, operational efficiencies and increased valuations for firms. Private Equity Manager sat down with Michael Groeger, vice president of private equity for UnitedHealth Group, to find out more about what his company can do for firms and what sorts of challenges private equity may face regarding health costs in the future.

Private Equity Manager: Why are more companies focusing on this area now?

Michael Groeger: The notion of aggregation is fully in play, especially at the larger PE firms, and not just regarding health care. But I think that healthcare is one of the last to really be touched, mainly because it is such an emotional and territorial issue. And honestly the procurement professionals and a lot of the PE firms don’t deal with it a lot, they kind of go to what they know. So that has been changing due to the amount of dollars at stake, and with the advent of more and more operating professionals working within the portfolios to bring costs into line.

PEM: What are the main issues PE firms are generally facing regarding their portfolio companies and health care right now?

MG: I think from a pretty high level, the biggest issue is they may not know the level of variation that exists within the portfolio. Anecdotally, they’ll hear from each of the portfolio companies, who’ll say “hey we are doing fine, we are managing our increases, we have a good consultant, we are heavily engaged in a number of different initiatives,” be it wellness or clinical initiatives. But if they plot out health care costs vs. the median for each of those companies, what would that graph look like?
More often than not, the graph contains tremendous levels of variation depending on the strategy that might be in play at each one of these portfolio companies. So you may have some people who have embraced high-deductible strategy, whose overall costs might be lower than the median. Or you might have others who for whatever reasons have a generous plan that may be well over the median. So getting your arms wrapped around what differential lies within the portfolio companies is kind of the biggest thing I see. And that’s what we really talk to people about, because if you catch a numbers guy – and managing directors of private equity firms are numbers guys – not knowing a number, it can cause some questions to be asked. If the median spend is $9,500 per employee per year and you’ve got some companies at $12,000 and some at $7,500, what can we be doing to drive these companies more toward the median or maybe even below the median toward that lower cost spend?
So that is the one thing we really want to focus on, to delve into the variation that exists at a high level. And that could be from an administrative expense standpoint, the differential in networks by market, contribution strategies or it could be the types of plans that are in place. When you start driving on each one of those areas, then you can come up with some sort of meaningful savings based on a very big number – which is what a health care spend is – and you can impact the overall.
That being said, it is really critical that the PE firm be experienced in aggregation strategies, have the infrastructure to support the initiative – be it a portfolio manager or operating professionals, because it takes work – a significant commitment and it has to be top down. And it has to have C-suite buy-in at the portfolio company as well, it can’t just reside with the managers. So there are a lot of moving parts, but if a firm is motivated, it is looking at a savings number of anywhere from 5 to 10 to maybe even 12 percent on a pricy expense.

PEM: What sorts of programs does UnitedHealthcare offer?

MG: From our standpoint, what we’ve developed is essentially a private equity vertical within UnitedHealthcare. All of the services that are required to migrate portfolio companies into this strategy are aligned with dedicated or designated units within United. And that would be sales, underwriting, implementation, account management, reporting, and customer service. And they are all specialized in dealing with portfolio companies and the special needs of private equity firms. Since 2005, UHC has developed this private equity vertical, and it’s been refined tremendously over the course of the last 18 months as we learn more about the market and see other things that work and don’t work.
Beyond this, there is a second sale aspect to this entire arrangement that takes place between the private equity firms and the portfolio companies: “Why would I do this when I can go to my local broker and use standard distribution channels?” And so we’ve set up solutions that provide a number of things that aren’t available to groups based on their size. For instance, you have a 500-employee company, they are going to get the benefits of being a 5,000 or 10,000 employees, so they are going to get much more value. So we’ve gone through this packaging exercise that helps promote these ideas to portfolio companies and work hard with the PE firms to make sure that it’s an understandable message.

PEM: What sort of market need was this program originally created to address, and how has it expanded since then?

MG: We saw that with standard distribution, we would have outstanding relationships with our customers, and for what appeared to be no reason at all, we would lose customers. When we would investigate further we would find that there was some sort of private equity initiative or aggregation strategy may have been already in play, so we decided we had to get ahead of this curve as soon as we could. And the more that we looked the more that we found that there was an opportunity. To start though, most private equity firms are looking for some sort of incentive to do this, some sort of upfront savings and usually that takes place on the administrative side.

PEM: Is there a particular firm that would be best suited for this?

MG: The larger the better, because there is some segmentation that takes place within the portfolio in a couple of ways. First is by geography; we want to map out where the portfolio companies exist versus providers. So say if you have 30 companies, we may lose five out of there; maybe the companies are located rurally or something. So now we are at 25.
Then we do it by size; anything under 100 is out of scope. Groups under 100 are heavily regulated, and pretty much their rate basis is set by local mandates and government. So maybe there are five more of those and we are down to 20. Then maybe segment by funding and other factors that come into play and we lose a few more. So from the original 30 maybe you are now down to 17. And that’s what you want to do up front, you want to level set expectations about what the real opportunity is. I think a lot of times when a PE firm gets involved in this, whoever is handling this wants to know what this really means and what is the real opportunity.
Now maybe taking on all 17 is not the way you want to go, maybe you have a group of champions, a group of CEOs within that 17 that you know you can work well and get this off the ground, maybe get five or six groups that start it and put in some later adopters and then continue to build it. We’ve found that’s the best strategy. It is about setting expectations, be clear in your communications and getting the buy in.
A PE firm should also have at a minimum about 3,000 employees under management to consider this option. If you go underneath that you are going to lose too many employees to the variability I talked about earlier, and also the scope of what you can impact isn’t that great. So you start with 3,000 and end up with 2,000, you have a workable population. Ideally you’d like to be north of that number, closer to 5,000. But the thing we can help them with initially is that segmentation exercise based on geography. If we can get some census data about the entire population, we can map that out to gauge accessibility and to derive a discount potential versus their current vendors. And that is when it gets fairly meaningful. So if their current population is 1.0 from a discount standpoint, maybe we are coming in at a .975, well 2.5 percent just from a discount standpoint is pretty meaningful on a big spend.

PEM: How do other aspects like patient behavior affect costs, and can these be impacted?

MG: United has taken a strong position on consumer activation. It really comes down to the philosophies of the portfolio companies and what they want to do, and that philosophy can really be set by the PE firm. However, one area that we’ve found that they are kind of hands off has to do with wellness initiatives, things of that nature. You can drive an overarching wellness strategy within the portfolio, but philosophically there may be reasons why PE firms don’t get into that. But that doesn’t minimize the fact that companies themselves are continuing to focus on those areas. That’s something that we have a complete infrastructure built around and have designated professionals in the PE vertical that can help us regionally to implement any strategies based on budgets and goals that groups want to deploy.