Take It from the Top

To cut costs, private-equity firms are purchasing insurance for their portfolio companies, but it's not easy.


Private-equity firms are getting more involved in the health-care game, and not just from the acquisition side. To cut costs, they're buying health-care plans for their portfolio companies.

The Riverside Co., a private-equity firm with three funds totaling $1.3 billion, is rolling out a plan to the majority of its 51 companies. The plan, offered by United Healthcare Services, the first insurer to provide health coverage specifically for private-equity firms, allows Riverside's companies to cut costs by aggregating their employees. Other private-equity firms purchasing health care for their respective portfolio companies include The Carlyle Group and Baird Capital Partners.

The move fits into Riverside's strategy of gaining volume discounts by making some purchases at the firm level. "Some private-equity firms, when they aggregate their portfolio companies, can have almost the same buying power as a GE," says Pat Brady of consultancy Crawford Advisors. Riverside also purchases shipping, travel, and telephony services for the companies it owns.

Purchasing health coverage for a portfolio of companies is much trickier, however. Because the companies are rated independently, the claims history of one company must not affect other companies that are owned by the same private-equity firm. To make sure that doesn't happen, the private-equity firm signs a master contract with the insurer guaranteeing a discount. Each portfolio company then signs a separate contract. This two-tiered structure also makes it easy to add and subtract companies from the plan as they are bought or sold by the firm. The plans allow for some customization by the individual companies. At Riverside, CFOs of portfolio companies sit on a steering committee to offer input on the master plan and exchange ideas about plan design.

Pamela Hendrickson, chief operating officer at Riverside, says some companies will remain on independent plans, which will enable Riverside to compare the savings it has been promised from aggregating the health-care purchase. "It keeps [the insurers] honest," she says. — Joseph McCafferty


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