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Risk in Context Podcast
Optimizing health and benefits programs across private equity portfolios
00:24:25
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- [00:07]
A
Welcome to Risk in Context, which features conversations with Marsh colleagues, risk professionals and others intended to help you better understand key risks, build more effective insurance programs, and think creatively about risk. I'm Alex Ackerman, Marsh's private equity and M and A Services practice leader from North America. Managing health and benefits programs effectively presents significant opportunities for organizations to control expenses while enhancing employee retention and recruitment. As healthcare costs continue to rise, organizations, especially those managing multiple portfolio companies, can leverage portfolio wide health benefits strategies to achieve scale, consistency and cost efficiencies. In this episode of Risk and Context, I'm joined by Kathryn Gensheimer, Chief Client Officer for Marsh's North America Private Equity and M and A Business, and Tom Shea, Senior Principal and Health and Benefits Consultant at Mercer. We will discuss why private equity firms should consider portfolio wide health and benefits programs and share some actions you can take to implement these programs. I'd like to welcome our participants today. Katie Gensheimer and Tom Shea, I'd like you to briefly introduce yourselves, talk about your roles and how it relates to the risk we'll be talking about today.
- [01:25]
B
Katie My name is Katie Gentheimer and I'm the Chief Client Officer for Marsha's private equity practice in North America. I plan to talk about how the strategies that we've been deploying across our client base relative to insurance can be additive for health and benefits as well.
- [01:46]
C
Good morning everyone. I'm Tom Shea, been with Immersive for just about 30 years in their health and benefits space. In my role as a private equity health and benefit portfolio manager, work closely with Katie and Alex across our private equity portfolios helping make sure we can deliver on their benefit side.
- [02:03]
A
Thank you both and appreciate you joining today as we start to get into the conversation as we think about health care costs generally in the last handful of years and the expectation that over the next couple of years costs will continue to rise, we're faced with a scenario where there are opportunities to potentially look at these costs and look at the levers that drive these costs across a portfolio of investments. We can utilize different approaches for retention, recruitment and also adding value to portfolio company that can aid exit strategies. There are benefits to scaling health and benefits programs and purchasing across the portfolio and the strategy has been well utilized for insurance programs already. Katie, perhaps you can talk about the portfolio program generally speaking and then we can go into a bit about how that concept could aid in the health and benefits program for a private equity firm.
- [03:03]
B
Thanks Alex. So when we talk about what a portfolio strategy is, we talk about it through the lens of kind of a four legged stool. There's cost, coverage, claims and resiliency. From a cost perspective, we want to do better than what the market's doing. From a coverage perspective, we want there to be best in market coverage terms for claims. We want to drive optimal claims resolution because that is of course why you buy insurance to begin with. And from a resiliency perspective, we want to help harden the asset against loss and essentially make it more valuable. A lot of those themes are applicable to what we're talking about today relative to health and benefits as well. We know that careful coordination across a portfolio can be additive. In fact, in speaking with a recent sponsor about what we've been able to drive across a portfolio of roughly seven portfolio companies, we saw average cost impact of 6.7% below the average Mercer book of business of 12%. That in aggregate drove cost avoidance of approximately $7.3 million. So that is tangible evidence that this approach works and we think could be equally additive to other portfolio accounts holistically as we move forward.
- [04:37]
A
I think one of the benefits from a portfolio wide approach, particularly to health and benefits, but also, you know, across other areas, is the attention that can come to different fragmented approaches and paying attention to the levers that perhaps haven't been pulled or haven't been pulled appropriately to drive a benefit in the program, whether that's multiple strategies, multiple providers
- [05:05]
C
not
- [05:05]
A
paying attention perhaps to where certain value drivers are that have or have not been pulled. And so from that perspective, I'd like Tom to talk about how can a portfolio wide purchasing strategy be implemented to health and benefits and how do you think about, you know, how difficult this is or how easy it might be to streamline some of these portfolios. Thanks, Alex.
- [05:32]
C
I think that's a really good question. And if I could, I'd like to just tie into a little thing that Katie had mentioned around the increase that we've seen in some of the higher costs. So if you look at a average benefit plan here in the US they generally run on a calendar year. So January through December, some run on different timing, but when we looked at January 2026, it was the highest increase in health care spend in the past 15 years. When we project out where we see the increases for 2027, it's about the same, if not higher. And what that means is that a quarter of the companies in this country are going to see another double digit increase in their overall healthcare spend. So it's really important to have a portfolio strategy to make sure we're taking care of the entire book. So just using that as a bit of a context where we've seen success in this is really, as you said, having that approach, a defined approach that we actually go into and look at. So a couple of things that we want to do looking at it is you want to make sure that your funding is set appropriately. So do you have a fully insured group where you can have the risk all managed through the carrier, or do you have a self funded group where you're managing some of that risk that you take on and use backstop with a stop loss? There's also, we want to go through and look at the medical plan design. We want to look at things like pharmacy carve out. Some of the listeners may be saying, well, pharmacy carve out, we've already done that. Yes, you've done that from a procurement perspective. But are you doing the ongoing clinical management that needs to maintain with that? And are you looking at that every single year? One of the challenges we're seeing within health care, and we've all seen the commercials on tv, you can't watch any shows without seeing a commercial for some new medicine. Those new medicines are coming out quarterly. Their prices and their rebates are changing quarterly. So you want to make sure that you're looking at it every year with your health plan and not just making sure you settle for a three year contract. Then there's a program around managing your high cost claimants and I can save that and talk a bit about that in a minute and then certainly making sure that you're looking at your stop loss, which is your reinsurance, to make sure you're protecting. So if I think about Katie's cost coverage claims and resiliency, hopefully those tie back to the items I just shared.
- [08:01]
A
That's great, Tom. And I think about the other dynamic is as we look at finding opportunity in the portfolio, that really starts with diligence. A lot of what we're doing during diligence is looking at not only the risks that might be apparent in an acquisition, but also the opportunities. And along those lines, when we look at a portfolio program that creates the platform to roll in a lot of these new acquisitions, whether it's tuck in acquisitions or new platform acquisitions. And maybe talk a little bit, Katie, about some of the areas that our private equity clients achieve strength in their portfolio from sort of that diligence phase through to the transition into a portfolio arrangement.
- [08:49]
B
Sure. And you know, look, I think arguably the path to a successful exit starts before the close Is even consummated. You know, if the sponsor is thinking about cost for both insurance and benefits on a holistic basis, they will be able to identify those opportunities for optimization upfront and will be able to build them into their financial model, into the 100 day plan, and so on and so forth. So it's really important that this kind of thought process and application begin in diligence. And that's where choosing the right partner for diligence can be very additive because you can then start to appreciate what the longer term opportunity might be. So when, you know, a lot of our sponsors have, and participating portcos for that matter, have some misconceptions about portfolio wide programs that I think would be helpful to address up front. Because a lot of common objections to these portfolio programs stem from assumptions that people have around rigidity, cost and concentration. And in practice, careful program design, governance and servicing mitigate these concerns and really allow portfolio programs to deliver the customization and efficiency that are needed in order to drive outcomes. So, you know, some of these common myths are that one size fits all. In reality, well designed programs are configurable and can be tailored to different entity types, types of businesses, risk appetites. So you could have some employers who have fully insured plans, whereas some others could have self funded plans. Another common myth is that only large organizations benefit from these constructs. And you know, while scale does increase some advantages, it's our experience that small and mid sized companies can also benefit. Another myth that we hear is that they concentrate risk and increase volatility for participants. Whereas what we have seen in practice is that properly structured programs include diversification and with the right controls can help manage concentration and volatility. And lastly, what we've heard is that these programs create excessive administrative burden and complexity when yes, the initial setup can be complex, but the centralized administration and standardized processes that are introduced can reduce the ongoing administrative effort for participants. So in the longer term, it's a good use of time.
- [11:56]
A
Great. Tom, do you want to maybe add some perspective on how the benefits there translate into outcomes for private equity firms within their portfolio?
- [12:08]
C
Yeah, absolutely. And I completely agree with what Katie was saying. And just to tie into your last question there as well, Alex, you know, starting with diligence is absolutely important. We've seen in years past benefits may not have risen to the same level of rigor as we've seen with investments and insurance across diligence. By doing that more effectively and more routinely going forward, funds are going to be much more protected. So certainly completely agree with That I would also echo and agree with that having guardrails is, is the success of a portfolio program. You know, we definitely don't want one size fits all. I agree with Katie. We've seen that very effectively one size does not fit all. So you want to have those guardrails. And I would also say for our smaller and mid size clients that we work with that are part of funds, getting access to that larger scale is part of the benefit and the value of being part of a portfolio team. So lots and lots of synergies between what we're doing on the investment side and what we're doing on the benefit side. The other piece I would may tie into is not only from a diligence perspective, but ongoing perspective. As we're looking across many of our fund holders, we're seeing that the, the hold periods are longer. Right? It may not be the initial three to five years. We're seeing longer and longer holds. You want to have that robust portfolio program which is doing annual stewardship reporting, which is measuring back to what are your goals, what are your targets, what are your benchmarks. So, so you can have that early identification of any outliers so that you can then use your portfolio programs to help bring them back in line to make sure you're maximizing that value creation. And then. Sorry Alex, to finally answer the question you asked me, you know, how have we seen this actually successful? I'll use an example of a portfolio company that we work with. It's been a fund that we've worked with for years. I'll take a selection. They have eight self funded medical plans that they work with them, a couple thousand lives, couple hundred million dollars in benefit spend. And if we look over the last three years, so not just this past year, but for renewals in 26, in 25 and in 24, so a fairly credible Runway. We have seen that their portfolio wide renewals have come in at 50% of expected trend. So yes, they're still seeing a small incremental increase, but it is much better than what we're seeing from a nationally trend or a group that's not part of the portfolio. So I use that as a really good example of the success of the portfolio approach model.
- [14:42]
A
Thanks, Tom. So if I can just kind of sum up that part of the conversation here. Ideally what we're looking at is making sure that we're having a sound strategy going into diligence and then ultimately having a platform, platform for execution and having that portfolio program be that platform so that once you do have a plan and you've identified both the opportunities and the risks, you have a way to go and put those to work. So we'll move to the next section of the conversation. And now that we've talked about the benefits of portfolio wide programs broadcast broadly, I think it's important that we talk about practical steps and get a bit more granular that folks should think about to build an effective portfolio wide health and benefits program. Tom, do you want to talk a little bit about some of the more granular strategies?
- [15:42]
C
Yeah, so really good question. And I think that it's important here, as you're looking at this, that you have the right partner to be with. Right. So as Katie said, this shouldn't be an overwhelming or this shouldn't be a daunting process that stops you, but it is absolutely a process you want to go on. You want to make sure you have the right partner with you. And as we start looking at it, there's a few things you want to do. You want to understand what is the reporting. So you want to holistically look at your portfolio. If that feels like it's too big, look at what your renewals were in the benefit space for last year. So who are your key expenditures on the health side? Right. So you're going to look primarily at your medical and your pharmacy. There are other benefit spends, absolutely. But medical and pharmacy are going to drive the vast majority of your spend. So that's where you want to look. Look at what that spend is, look at what that renewal is, and then work with a partner who can help you start to decompose that. Right. So what is medical, what is pharmacy? If pharmacy is more than 20% of your overall spend, because that's what the national average is right now, that's a red flag that you want to do a double click. You want to go deeper into your pharmacy plan. When you start to look at both your medical and your pharmacy, you want to start to look at what are your high cost claimants. Those are that 2 to 3% of your population which is driving 60% of your medical spend. So what are the clinical indications? How do you have clinical programs around that? How do you have care management around that? So those are a couple of the key things you want to look at first. And then I would say the next thing to look at would be your stop loss. Right. So this is your reinsurance, this is your protection against catastrophic claims. When you look at that, there's the financial component, but there's also a terms component. You Want to make sure that you have the right contract in place that provides the right level of protection and you can do all three of those within that first year as you're building out a portfolio program to make sure that you have those protections. And not only those protections, but also they can help with some potential value creation as you're bringing down your overall costs.
- [17:45]
A
Great, that's helpful. And then I guess maybe to take it even a bit further into a little bit more granularity. How are Mercer specialists helping P firms accomplish these goals specifically, particularly around data analytics, benchmarking. How are you thinking about utilizing those tools to drive outcomes?
- [18:08]
C
Yeah, really good question. So I would say, you know, to answer the data and analytics, we have one of the largest, most robust databases of employer sponsored healthcare spend. We do an annual survey. It is the largest, most credible survey in the industry as well as ongoing data collection that we do. So our data is second to none that we have access to. We also have a digital process where we work in real time. We do some co collaborating with our clients. We're able to not only just do the work, but do the work with them in a collaborative manner. So that's super effective. And I would say the third thing that we do that is really helpful is historically, folks may have thought that benefits was really the domain of the CHRO and it would stay there almost in an island. What we're able to do is bridge that between the CHRO and the cfo because as we've mentioned, with the costs that we're seeing from benefits, it's really a joint conversation and that helps bring it back to the fund manager, to the DEAL team as well. So we're seeing a lot better success there. And what the Mercer teams have done, because we're able to speak to the chro, because we have our dedicated actuarial teams within our private equity teams, we're able to speak to the CFO and to the DEAL teams and it's really bringing that overall picture together where we've been been very successful.
- [19:29]
A
That's great. Thanks, Tom and Katie. I guess now that we've sort of gotten down into a granular level on the work that we're doing on health and benefits programs and specifically around the drivers there. Can you talk about how our specialists work kind of hand in glove to make sure that we're covering both sides of this in a way that are efficient and also organized to drive the right outcomes?
- [19:56]
B
Sure. So as we talked about, you know, ideally we start in diligence. We understand prior to the actual investment, what the opportunity might be from both an insurance as well as a health and benefits perspective. But to the extent that a sponsor wants to understand what the macro opportunity might be across an existing portfolio, we also have the ability to do a diagnostic process to outline what the both opportunity and kind of pathway forward for existing investments. To give a little bit of insight into size and scale there, we recently did this process for a middle market, healthcare focused investor. The aggregate insurance spend across, call it 15 portfolio companies was approximately $25 million. The aggregate cost for health and benefits across the same population was over $100 million. So while of course making sure the insurance program is appropriately constructed, can be additive and is certainly a core competency and focus of our team, there are meaningful dollars associated with the health and benefits that if properly managed, can be very, very additive. And so, you know, when our team took a look at that program, some of the findings that they saw that were easily pulled levers was that there was inconsistent utilization of funding alternatives across the portfolio. There wasn't consistent data to help fuel population health management and cost avoidance. There wasn't broad or consistent alignment across carriers to leverage outcomes. And there wasn't any broker consistency with the sponsor or the broker's needs. So what we found was that there was absolutely opportunity, even in a very difficult environment, to help that sponsor and its portfolio companies drive down costs while at the same time minimizing the impact to the underlying employee populations.
- [22:00]
A
Great, that's super helpful. So, as we look to the end of our episode, you know, we've obviously discussed a lot today, so I'd like to invite each of you to share one final takeaway. If you had to leave something with with the listeners of of this podcast, what would that be? Tom, maybe I'll go with you first.
- [22:19]
C
Well, thanks, Alex. It's been a really good conversation. I appreciate you inviting me to join it. I would say the one thing I would strongly recommend folks do right now is take action. Right. With the expected increase that's coming for January 1st of 2027, I want to make sure that there are no surprises. We've talked to many other funds and the one thing they've asked me is make sure we never are surprised again. So take action now and take action within the confines of a structured portfolio program. That's where you'll have the best results as you look to move forward.
- [22:50]
A
Great.
- [22:51]
B
And Katie, so Tom, I don't think you and I chatted beforehand about what we were planning to say right now. And you and I had the exact same thought. Now is exactly the time to take action. We don't think the environment is going to get any better or any easier. So the longer that decisions are delayed or deferred, arguably the worse the outcomes will be, certainly for 2027. But as hold periods continue to be extended, as the macroeconomical environment is still uncertain, to the extent that there are levers that can help drive outcomes and more control, we believe it's a good time to pull those levers. So exactly what you just said, Tom. Now is the time to take action.
- [23:46]
A
That's all for this edition of Risk in Context. We hope you enjoyed our discussion and thank you for listening. You can rate, review and subscribe to Risk and Context on Apple Podcasts or any other app you're using. You can also follow Marsh on LinkedIn or X. In addition to your podcast feature, you can find more episodes of Risk and Context. More insights from Marsh on our website marsh.com until next time. Thanks again for listening.