We recently met with a private equity firm concerned about rising costs for health benefits. Like many companies, the businesses in their portfolio were facing 8%-12% annual rate increases. With recent analyses suggesting coronavirus could increase health insurance costs by 40%, they braced for an enormous jump in costs.
That changed when we discussed reference-based pricing. Unlike fully-insured plans, self-funded plans can use reference-based pricing to examine the price and performance of doctors, nurses, and surgeons to access high-quality, low-cost hospital stays, surgeries, doctor visits, and prescriptions. In many cases, reference-based pricing can save companies hundreds of thousands—even millions—of dollars each year.
The members of the private equity firm immediately recognized reference-based pricing as a major opportunity. Since most firms look to acquire, build, and exit companies in approximately five years, reference-based pricing is a powerful strategy for maximizing the value of a business by reducing annual expenses. Although the immediate cost savings are a major benefit, reference-based pricing can indirectly increase revenues by helping to attract and retain top talent with a robust benefits package.
Reducing Costs, Increasing Value
By its very design, reference-based pricing uses data to create savings and deliver cost-containment strategies. In a fully-insured plan, private equity firms are subject to the economic influences that increase premiums around 10% every year. Reference-based pricing offers companies greater control over their plans so they can reduce or eliminate these rate hikes by finding low-cost strategies for better health outcomes. Employees can actually access better care at lower costs.
The opportunity to invest in higher-quality care creates additional long-term savings. When employees access better facilities with skilled doctors and surgeons, they experience greater health outcomes. In a fully-funded plan, employees use whatever surgeon or doctor they are referred to within their network. Because this isn’t a data-driven approach, patients may unknowingly end up with low-performing doctors and surgeons. With these lower-quality medical professionals, employees may require additional recovery time and are more likely to experience complications.
The result is additional medical and pharmaceutical expenses that cost more than seeking better care from the beginning.
Talent Acquisition Opportunities
Reference-based pricing’s focus on low-cost, high-quality care means investors may see additional revenues and savings by creating a new tool for talent retention and acquisition. We commonly see businesses use two powerful techniques to attract and retain talent:
1. Tout low-prices and great value. Once the robust, low-cost health care plan is in place, you have a new carrot to attract top talent. If your company can offer better care at lower prices, you’ll be competitive when courting high performers.
2. Reinvest. Some companies decide to reinvest their savings back into their workforce with the following strategies:
- Pick up a larger share of employee premiums or deductibles
- Offer profit sharing
- Offer a larger match in the company-sponsored 401(k) plan
- Invest in additional employee benefits
Both of the primary strategies above—touting better benefits and reinvesting in your workforce—assist in attracting top talent. Once your top-performers are in place, their contributions can increase productivity and increase revenue. As your company grows, other top performers will take notice. This starts a wonderful growth cycle: Your company offers great benefits, which attracts better talent, which increases revenues, which leaves you with more cash to offer better benefits, hire talent, and pocket bigger profits.
Seizing the Opportunity
Companies all over the country have already unlocked reference-based pricing’s potential. For private equity firms who want a meaningful boost in valuation, reference-based pricing has the ability to reduce expenses while creating new revenue opportunities.