In 2021, industrial and manufacturing mergers and acquisition (M&A) activity reached record highs — and trends point to a healthy deal market in 2022, according to the KPMG Annual Senior Executive M&A Survey in December 2021).

While the topic of M&A is both broad and complex, we believe 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 once primarily fell on the insurance carrier is now more directly the employer’s responsibility. The 2020 Kaiser Family Foundation Survey of Employer Health Benefits reports that 67 percent of employed, insured workers are covered under self-insured, or self-funded, arrangements.

In a self-insured funding structure, the employer assumes liability for claims up to a certain threshold, and 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 for both the individual member and the overall group.

It’s the gap between the member share and the stop-loss that provides significant variability in costs for the employer, so it’s critical to quantify this liability when evaluating a M&A opportunity. Unfortunately, simply looking back at the group’s financials doesn’t always provide the most accurate picture of what is going on in the group’s population, nor what is expected in the future.

Sophisticated due diligence and thorough integration planning evaluates 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 profit and loss and may very well impact the valuation of the business; however, 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.

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 most accurately assess the value of a business, you must know the health plan liability, and 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 analysis is necessary to identify, understand and manage the health plan risk associated with your M&A, so arm yourself with the insights necessary to complete a M&A that positively impacts your business in both the short-term and over the long-term.

About the Author

As a consultant with Gibson and a Health Rosetta Advisor, Brian Bellware helps leaders deliver world-class health care. Brian is independently Certified by the Validation Institute as a Certified Health Value Professional and is one of eight Health Rosetta Advisors in Michigan and of only 204 nationwide. He can be reached at 269-998-1276 or bbellware@thegibsonedge.com.