Brian Stovsky

HOST COMMITTEE 2023

Brian Stovsky, Business Development Leader, Private Equity

Today’s headlines are filled with talk about inflation and rising prices. Although recent Consumer Price Index (CPI) reporting has showed a slight curve in trend, businesses will continue to deal with the balancing act of absorbing cost increases while retaining employees.

The cost of labor and benefits continues to rise, putting pressure on buyers to perform more in-depth reviews of these cost items pre-closing, and to have a thoughtful post-closing plan to tackle any issues found.

What is the state of the health insurance market?

The cost of health insurance saw an uptick as 2023 drew near. The average increase for fully insured plans, with no plan design changes, ranges from six percent to eight percent, year-over-year, according to the Society of Human Resource Management and the Kaiser Family Foundation. That’s a full percent higher than increases experienced a year earlier.

The increases are due to myriad factors. Over the previous 24 months, the pandemic hindered members’ ability to see health care providers for procedures deemed non-essential and, while claims reduced during the lockdown, they rapidly bounced back once providers’ doors re-opened.

Further, the severity of claims increased. Many conditions worsened over the period when users were unable to see providers in-person. Claims data experiences a lag in reporting and we expect the increase in claims trend to continue into 2023.

Providers are also putting more pressure on insurance carriers during contract negotiations, particularly regarding provider reimbursements. All indications show that it will cost carriers more in the future to maintain their relationships with hospital systems. Those increases will be felt by consumers in the upcoming years, including the most recent fully insured renewals released for Jan. 1, 2023.  

How Buyers Can Adapt

Buyers should be cognizant of market trends when looking at a target during due diligence and include assumptions based on trend when developing proforma financials to gain a more accurate picture of the ongoing cost of insurance. To combat trend, buyers can work with their benefits/risk advisor to analyze current benefit plan designs, costs and claims data (if available) during due diligence and determine options to control costs and flatten the curve.

Below are a few options that have been successful.  

·         Introduce self-insured plans or hybrid-funded plans (including HRA wrap plans) to reduce fixed costs while taking on some additional variable liability. Self-insuring a plan enables buyers to carve out prescription drug or disease management, giving employers more control over their costs.  

·         Educate employees on lower-cost provider options, such as telemedicine and virtual visits when appropriate. Additionally, direct primary care or a narrower provider network are available options. Advisors can determine the adequacy of such options through a provider disruption analysis. Any of these options directly impacts claims, thus mitigating the impact of trend.

Education and engagement can also be used as a retention tool, specifically after an ownership transition, easing the integration process. Employees tend to respond well when given more education around their benefits, which reinforces a positive company culture.

How Does Human Capital Play a Role?

Employees are the primary drivers of a business, but they are also a leading expense. Identifying key employees and understanding processes to hire, retain and ensure employees reach their potential are all imperative to successful transactions.  

An evaluation of internal processes to assess benefits and compensation, as well as compliance, should be a consistent practice for businesses. The stress on businesses to provide competitive compensation and benefits packages to their employees persists and will continue to play a factor in keeping key employees and improving retention, specifically through a transition of ownership.

Human resources (HR) and human capital due diligence assesses the value of a population or employee base of a target and will assist a buyer in identifying key employees as well as any red flags or shortcomings in terms of their processes. An HR advisory team can also review targets for discrimination or compliance issues among employees and identify employees who are pertinent to the business continuing on a consistent trajectory. Alternatively, an HR due diligence advisor can help a buyer identify areas where additional employees may be needed moving forward.  

Buyers can also use an HR due diligence advisor to assist in creating a change management strategy during closing and post-closing planning. Change management involves communicating with groups of employees to ease the transition process and reduce anxieties employees may feel upon the completion of a transaction. During their post-closing planning, change management can be a great tool for buyers to use to obtain a consensus among employees on where meaningful improvements can be made.  This will increase the goodwill among employees for the new ownership.  

How to enhance employee recruitment and retainment   https://brianstovsky.wordpress.com/2022/04/07/recruitment-retainment-and-employee-benefits/