The pitfalls of healthcare purchasing

The Blackstone Group estimates it will save $50 million this year through its healthcare insurance group purchasing programme. Yet at the PEI Strategic Financial Management conference in New York this July, the great majority of attendees said their firms weren’t considering implementing such a programme across their own portfolios. In an economic environment where private equity firms are looking to cut costs wherever they can to keep their portfolio companies alive, why aren’t all private equity firms trying to leverage economies of scale in buying health insurance for employees at these companies?

There are real and perceived pitfalls to group purchasing programmes, particularly for health insurance, industry sources say.

One of the fundamental problems is that health insurance can be an emotional issue – as protests against President Obama’s healthcare reform plan have demonstrated in the US. Different groups prioritise different types of coverage, so plans need to be somewhat flexible.

“If you want to pool the purchasing on office supplies, it’s not really a very emotional issue. No one really cares where they buy paper clips,” says The Riverside Company’s chief operating officer Pam Hendrickson.  “But people really care about their benefits. So it can be a very emotionally charged issue and I think some PE firms just don’t want to get in the middle of something like that with their portfolio companies.”

Riverside established its group buying programme in 2004 at the request of its portfolio companies, who were struggling with high health insurance costs. Because discounts are won not just by bulk purchasing power, but also by a good claims history, the programme has evolved since its inception to include preventative initiatives and an educational component on how to use healthcare efficiently.

Though Riverside requires that companies participate unless they have a good business reason not to, the firm has sought to avoid discord by establishing a steering committee for the programme composed of representatives from its portfolio companies. This allows employees to rest assured that they have a voice, and it helps Riverside avoid “landmines” when designing plans, Hendrickson says.

Another issue is that for private equity firms with a geographically diverse portfolio, it can be tough to find one provider with strong network coverage in all the right regions, says Mike Groeger, vice president of the private equity practice at UnitedHealthcare.

“If they have a lot of rural companies, it might be difficult to reap the benefits,” Groeger adds. “Or aggregation may not be an option at all, because it’s very difficult to drive discounts in rural areas, because there’s no competition.”

A private equity firm with a small portfolio, or a portfolio of small companies, would also have trouble reaping the benefits of a group buying programme, Groeger says.

“If the groups are smaller, under 100 employees, then we start running into a lot of the state regulatory benefit mandates and other regulations that we have to comply with,” he says. “The notion of aggregation doesn’t really work at that point, because you really have to follow a playbook on those groups and you can’t deviate too much. For much bigger groups, that’s when it starts to make sense. For us, it’s a total of 1500 employees to start with. Bigger than that is more of our sweet spot. Groups of 4,000 to 5,000 are where we can start getting some meaningful results.”

Aside from these issues, there are internal reasons why some private equity firms choose not to aggregate health insurance purchasing. First, the programmes tend to require a fair amount of handholding, so a firm would need one or two people to oversee the programme and work with the portfolio companies. Smaller firms usually don’t have the manpower. Riverside outsources many of the administrative tasks to the carriers and to its broker, but still dedicates half of one person’s time to the programme.

Groeger warns against thinking that a programme like this can be viewed as just another benefit to offer. In order to ensure success, the private equity firm needs to be completely committed to the process and really throw its weight behind it.

“When [private equity firms] decide to do it, they really have to decide to do it,” he says. “They have to add heavy influence to this process. I’m not going to say mandates, but some level of compliance needs to be expected or else nothing is going to happen with the portfolio company.”