Finance Monthly March 2020 Edition

he first 100 days for a private equity (PE) firm is typically the culmination of an intense planning process. A PE firm – if it has chosen its acquisition wisely – has a five-to-seven-year plan where new metrics are emphasised, synergy savings are prioritised, and operational improvements begin to materialise. PE firm business acumen often identifies suboptimal operations, limited market channels, misallocated capital and stymied growth opportunities. The investment thesis of PE firms touches on all the standard objectives. So where is the unrecognised blind spot in the first 100-day strategic plan? PE firms have the market power to influence and reduce healthcare costs at portfolio companies, however, the vast majority of firms haven’t exercised this power. Generally speaking, PE firms and businesses have abdicated accountability to insurers, government and healthcare supply chain providers. This has resulted in a never-ending upward pricing increase at four times the rate of inflation. Essentially, portfolio companies have been the financiers of the inflated stock returns of healthcare industry providers like PBMs, hospitals, surgery centres and medical device companies. The net impact of unmanaged healthcare is the largest personal and corporate confiscatory tax of the last 20 years in America. Lack says he likes to ask, “ What’s the smallest action you can take to lower the healthcare budget ?” 1. Are you applying the same strategic rigour to your portfolio healthcare strategy as you do the rest of the business? 2. Is the healthcare investment a stated PE or C-Suite priority? 3. Can the recommended healthcare strategy control costs measurably and repeatedly lower the frequency and severity of claims? Lack explains, the financial engineering of healthcare risk to reduce cost and improve the portfolio balance sheet sounds about as exciting as driveway gravel, but once the PE firm can see the economics it gets very interesting very quickly. He continues: “ As good as this is for our clients, including the largest privately held insurance agency in America and the fifth-largest sports brand in the world, it’s even better for private equity portfolios .” He walks the reader through his thinking. “ How are other organisations able to spin off risk and avoid the inevitable adverse risk creep? “ Too often healthcare managers at portfolio companies are unable to quell the uncontrollable upward spiral of claims cost. Consequently, process and administration become the proxy for quality healthcare, and managers become trapped in a quest to find the next Best Practice, but they inevitably create less and less value. “ But what if a PE firm could stop trading lost profits, spent negligently on healthcare claims, for enterprise value growth? ” Last year Lack notes that a PE- owned client increased enterprise value growth by transferring risk in a way that no incumbents or vendors were replaced, no disruption or administrative burden was created, and there was zero employee noise. On the contrary, participants love their experience, and HR supports expanding the engagement. More importantly, Catilize Health, through its SIHRA program, measurably and predictably increased the annually recurring revenue and EBITDA of its client, which improved enterprise value. TODAY’S NEWS Healthcare is a constantly changing environment – the technology, the cost of treatment, the reimbursement rules and government regulations. That’s what makes it so complex. We all know this. Themost common trends are easy to recognise – they’re on the front page every day: • The cost of medical care is increasing every year. • The healthcare budget is now typically the second-largest operating expense ahead of IT spending. PE firms see this in their portfolio companies. • And now, healthcare is the second-largest expense for employees and their families behind only their mortgage or rent expense. “ We all know the cost of healthcare is going to continue to be painful for companies and families. Because of our experience managing hundreds of thousands of claims for tens of thousands of employees, we have developed unique insights ,” says Lack. These include: 1. To reduce healthcare costs, you actually have to increase benefits. It’s not linear as many think: i.e., 13 www.finance-monthly.com FRONT COVER FEATURE - RECAPTURE LOST PROFITS