Making health benefits part of your Environmental, Social, and Governance can strengthen your PE value creation and make you stand out in an industry that craves new ideas.
In this article
What is ESG?
ESG stands for Environmental, Social, and Governance. It refers to a company’s impact on the earth (E), how the company treats people (S), and how it’s run (G). It’s a way to measure corporate responsibility and ethical investing.
In addition to the responsibility component, ESG also helps companies streamline processes and realize improved financial performance. This is where health benefits come in; moving portfolio companies from group plans to HRAs gives you budget predictability, reduces your admin burden and is virtually guaranteed to cut costs.
HRA overview
HRA stands for health reimbursement arrangement. It’s a tax-free way for employers to provide health benefits to employees. HRAs have endless flexibility and scalability, making them an ideal option for PE portfolio companies of all sizes.
HRAs for private equity
The role of ESG in private equity
In private equity, ESG is especially important for value creation and exit strategy. Where it was once considered a nice-to-have, ESG is now a core differentiator for successful private equity firms.
In fact, an EY-Parthenon study shows that funds that are excellently positioned on ESG can realize an internal rate of return (IRR) up to eight percentage points higher than their competitors.¹
As the world of private equity becomes more competitive, HRAs are a sweet spot for value creation. They’re a proven cost cutter that’s new enough to set early adopters apart.
Private equity value creation framework
Of the PE value creation framework pillars—EBITDA growth, multiple expansion, and deleveraging—introducing an HRA focuses on EBITDA growth.
Replacing a portfolio company’s group health insurance plan with a Take Command HRA lets you:
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Control health benefits costs down to the penny
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Predict budget and accurately forecast
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Realize tax advantages
- Reduce admin overhead
As PE strategies become more sophisticated, new ideas are rare. Optimizing your ESG framework with an HRA demonstrates creativity to LPs and creates operational and budget efficiencies that can command higher EBITDA multiples.
Private equity ESG due diligence
Due diligence is a key part of private equity ESG. Doing your homework to identify cost-cutting opportunities and processes inefficiencies puts you in a great position for exit valuation.
ESG due diligence private equity best practices
When looking at due diligence, there are best practices to keep in mind. Since we’re discussing ESG in the context of health benefits, we’ll focus on two key elements: metrics and value creation.
Metrics: To show tangible gains to investors and potential buyers, you need private equity health insurance ESG metrics. Consider the following: costs for group health insurance, annual rate increases, administration overhead, and forecasting ability.
Value creation: PE due diligence is moving beyond risk mitigation to look at ESG opportunities that increase revenue and efficiency. HRAs can do both. Try it for a portfolio company by modeling out an HRA vs group insurance costs when you’re preparing a preliminary financial analysis.
Preparing for a health benefits ESG read-out
With your baseline metrics in place, put together a straw man to compare your group health insurance costs to an HRA.
Here are general comparison points to use as a guide:
| Group health insurance | Take Command HRA |
| Since 2010, average total [group] health insurance premiums have risen by 61% for families and 55% for individuals² | Take Command clients typically save up to 30% on health insurance costs |
| Employer manages administrative responsibilities | Our platform + support team manage plan design, employee onboarding, and reimbursements |
| Rate hikes do not allow for accurate forecasting | With a Take Command HRA, the employer sets the budget once and can forecast with 100% accuracy |
ESG integration in PE
Applying ESG to your private equity portfolio
ESG incorporates a lot of elements. If you’re wondering where to begin, here is a way to structure your effort:
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Start early: Make the ESG/health benefits conversation part of your 100-day planning
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Think holistically: Embed ESG into your investment lifecycle
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Measure results: Use your data-driven KPIs to demonstrate progress
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Communicate: Let partners and investors know how you’re driving success
It’s also a mindset. Integrating new health benefits as part of ESG will be a new strategy for a lot of teams, so connect with Take Command to prep your numbers.
How Take Command gives you a strategic advantage
If you’re in PE, you know the competitive landscape better than anyone. You also know that there is a demand for new ways to drive value creation and build a compelling exit strategy. That holds true for ESG and in general.
HRAs offer something unique: They’re proven but still in the early innings. That means switching your portfolio companies to a Take Command HRA puts you ahead of the game with the confidence of a proven cost-cutting method.
Use a Take Command HRA as part of your ESG
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Value creation: Nix group health insurance that’s a P&L drain
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Operational improvements: Streamline administrative work
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EBITDA protection: Forecast benefits costs with confidence
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Exit strategy readiness: Create undeniable value for investors
Customize and scale your portfolio
HRAs work for any size company and every type of employee. You can customize and scale a Take Command HRA for small business, mid-market, or enterprise (or any combination of the three).
Getting started with Take Command
| Customize your plan | Enjoy a smooth onboarding | Make effortless reimbursements |
| Design your plan for one or multiple portfolio companies, no matter how many employees or locations | Let Take Command manage the entire process and help employees easily transition to their new HRA | Use our platform to streamline monthly, tax-free reimbursements with clear reporting |
Resources for private equity
Why private equity firms are switching to ICHRA
Hear from private equity benefits consultant Kerry McArthur to find out how health insurance renewals impact EBITDA.
How health insurance renewals impact EBITDA
The private equity guide to predictable health benefits
How HRAs stabilize insurance costs for portfolio companies and help private equity firms achieve budget savings.
Read our private equity eBook
Why a PE-backed company made the switch
Learn why Prototek, a private equity-backed digital manufacturing company, made the switch to ICHRA.
Watch the Prototek success story
Contact Take Command to learn about private equity health benefits
Our experts are ready to help.
References
- https://www.ey.com/en_us/insights/private-equity/how-private-equity-can-optimize-esg-to-maximize-value-creation
- https://www.census.gov/library/stories/2024/02/health-care-costs.html
Let's talk through your HRA questions
Our HRA management solutions help companies of all sizes reimburse employees for health insurance, giving employees choice over what works best for them and promoting health and wellness within an organization. We offer ICHRA and QSEHRA administration software designed to be simple, effective, and empowering. Take Command is trusted by 7,000+ leading organizations and the only HRA administrator with in-house enrollment support.
