In this thriving economy, savvy leaders are preparing themselves to capitalize on Merger and Acquisition (M&A) opportunities to supplement organic growth. According to a recent study from Deloitte, “Corporations and private equity firms foresee an acceleration of M&A activity in 2018—both in the number of deals and the size of those transactions.”
The topic of M&A is both broad and complex. It is becoming more important to better quantify and understand the risk surrounding employee benefits, particularly the liability associated with the health plan.
With more companies transitioning from fully-insured to self-insured health plans, the claims liability that primarily fell on the insurance carrier is now the employer’s responsibility. According to the Employee Benefit Research Institute, “from 1996 to 2015, the percentage of privately-held companies that were self-insured rose from 28.5% to 39%. Companies with less than 1,000 employees have experienced the biggest increase.”
In a self-insured funding structure, the employer assumes liability for claims up to a certain threshold. There is typically some level of cost-sharing with the employee through co-pays, deductibles, and coinsurance. The plan sponsor protects against catastrophic “shock” claims through stop-loss insurance with established thresholds.
It’s the gap between the member share and the stop-loss that provides significant variability in costs for the employer. It’s critical to quantify this liability when evaluating a M&A opportunity. Simply looking at the group’s financials doesn’t always provide the most accurate picture of the group’s population, nor what is expected in the future.
Sophisticated due diligence, and thorough integration planning, evaluate the following relative to the health plan liability:
- Demographic risk analysis – including age, gender, geographic distribution, and underlying tier mix
- Claims risk assessment and predictive forecasting, including high-cost “shock” claims and IBNR (Incurred But Not Reported)
- Financial impact of merging funding structures
- Discount analysis by claims
- Run-off claims liability and timeliness of payments
- Deductible run-in and impact on claims experience
- Network disruption
- Plan value relativities
- Employee contribution integration and the impact on the net employer cost
- Renewal development projection for newly combined population
The expenses associated with a group’s health plan likely represent one of the top three on their P&L and may impact the valuation of the business. This type of quantifiable, credible analysis, is not only valued heading into a M&A evaluation and negotiation, it is paramount to have when establishing your integration strategy and preparing first-year financials.
For example, self-insured plans are subject to run-off claim liability. The speed and timeliness of future payments can drastically affect a groups experience and financial position. Most often when there are significant plan changes, there are indirect factors such as change in employee behaviors. Often, you find an increase in claims during the last few months of the plan year. Employees often want prolonged conditions addressed before the change. You will see an increase in IBNR for future months post acquisition, which means needed cash flow management to remain solvent.
What’s the Risk?
Without engaging an in-depth analysis in these areas, organizations may miscalculate the valuation of a business by overlooking significant liabilities, while also failing to properly identify and manage transitional factors driving your first-year expenses.
To accurately assess the value of a business, you must know the health plan liability. To successfully integrate two different health plans into one financially strong and high-performing health plan, you must quantify the impact caused by the transition. Advanced, actuarial-sound analysis is necessary to identify, understand, and manage the health plan risk associated with your M&A. Arm yourself with the insights necessary to complete a M&A that has an overall positive impact on your business.
