How Health Insurance Renewals Impact EBITDA and Why Private Equity Firms are Switching to ICHRA

When a private equity firm prepares a portfolio company for sale, every line item on the balance sheet comes under intense scrutiny. Potential buyers examine EBITDA multiples, cost structures, and financial predictability to determine valuation. Historically, health insurance has been one expense that felt impossible to control, with unpredictable renewals threatening to derail carefully planned exits. 

But there’s a solution that’s gaining traction among PE firms: Individual Coverage Health Reimbursement Arrangements (ICHRA). As benefits consultant Kerry McArthur explains in her recent discussion on ICHRA and private equity,¹ this alternative model helps companies bypass the need to report significant increases in benefits costs on their balance sheet. For PE-backed companies in the 5-7 year window between acquisition and exit, ICHRA offers the predictable cost structure that protects valuations and appeals to potential buyers.

The hidden threat to private equity exits

Most PE firms focus their value creation strategies on go-to-market improvements, operational efficiencies, and revenue growth. Yet employee benefits–often one of the largest expenses on the P&L statement–frequently get overlooked until renewal season arrives with an unwelcome surprise.

Traditional group health plans tie a company's insurance costs directly to the risk pool of their specific employee population. If even one employee or dependent receives an expensive diagnosis or requires specialized treatment, the entire group’s premiums can skyrocket with little to no warning.

For a company preparing for sale, this creates multiple problems:

EBITDA compression: A sudden double-digit increase in health insurance costs directly reduces earnings, lowering the company’s valuation multiple at precisely the wrong moment.

Financial unpredictability: Buyers value consistency and predictable cost structures. Volatile health insurance expenses signal financial risk and can reduce purchase price or even kill deals.

Balance sheet impact: As Kerry McArthur notes,¹ reporting a major benefits cost increase during the sale process raises red flags for potential buyers who are analyzing cost trends and projecting future expenses.

Where the problem hits hardest

The challenge is particularly acute in certain industries. McArthur points to home healthcare and retail as sectors where traditional group health insurance often fails. These industries face unique obstacles:

• Home healthcare companies typically employ a distributed workforce with varying schedules and locations, making group plan participation challenging. High turnover rates and part-time schedules mean many employees opt out of expensive group coverage, leaving those who do participate in a smaller, higher-risk pool.
• Retail organizations face similar dynamics: multi-state footprints, high turnover, and workforce diversity make one-size-fits-all group plans inefficient and expensive. When only a fraction of employees enroll, the risk pool becomes concentrated and renewals become increasingly unpredictable.

For PE firms with portfolio companies in these sectors, the traditional group health insurance model creates unnecessary financial volatility during the critical years leading up to an exit.

ICHRA: A strategic solution for private equity

ICHRA offers private equity firms a way to solve a health insurance unpredictability problem while maintaining, or even improving, employee benefits.

With ICHRA, instead of purchasing a group health plan, employers provide employees with a defined monthly allowance to purchase individual health insurance on the Affordable Care Act (ACA) marketplace. The employer sets the contribution amount based on employee class (such as full-time, part-time, or location), giving complete budget control.

Protecting EBITDA through predictable costs

The financial advantage for PE-backed companies is significant. When a company uses ICHRA, the employer decides the exact monthly contribution. According to Take Command CEO Jack Hooper,² many organizations provide employees with a monthly allowance “typically between $500 and $1,000” to purchase coverage on the individual market. This amount stays fixed regardless of claims experience, employee health status, or market volatility.

Come renewal time, there is no renewal. The employer simply continues contributing the same amount, or adjusts it by a predictable percentage based on their budget and strategic goals. This eliminates the risk of reporting a sudden major benefits cost increase on the balance sheet during due diligence.

From an EBITDA perspective, this predictability is invaluable. Financial leaders can forecast benefits costs with accuracy, model future scenarios for potential buyers, and demonstrate disciplined cost management–all factors that command higher valuation multiples.

The individual market advantage

When employees shop on the individual marketplace using their ICHRA allowance, they’re entering a much larger risk pool. As Hooper notes in PE Professional², companies “can now join the largest imaginable risk pool – more than 20 million Americans who purchase health insurance on the individual market.” Unlike a company-specific group plan where a limited number of employees share risk, the individual market spreads risk across millions of people, so one expensive diagnosis has minimal impact on overall premiums.

The individual market has also become increasingly competitive, with insurance carriers offering dozens of plan options at various price points. Employees can choose coverage that matches their specific needs, whether that’s keeping their family doctor, selecting a network with their preferred hospital, or choosing a high-deductible plan paired with an HSA.

This flexibility often results in employees finding better coverage at lower costs than what a one-size-fits-all group plan would provide. Some employees save money by choosing less expensive plans, while others can use the full allowance for comprehensive coverage, giving everyone the right fit for their situation.

Real-world results: PE-backed companies making the switch

Prototek, a private equity-backed digital manufacturing company with more than 250 employees across nine locations in multiple states, made the transition to ICHRA after facing steep renewal increases under their traditional group plan, according to Take Command CEO Jack Hooper’s article in PE Professional.² The company needed to control costs without reducing employee benefits quality, a common challenge for PE portfolio companies.

By switching to ICHRA, Prototek gained complete budget predictability while actually reducing out-of-pocket costs for some employees. Jenifer Combs, the company’s Director of Human Resources, emphasized the budget control: “We get to pick the dollar amount. From a budget perspective, especially since we’re private equity held, that’s key.”

For a PE firm managing multiple portfolio companies, ICHRA offers a scalable solution. The same model works for a 50-person software company and a 500-person retail operation. Companies growing through acquisition can easily integrate newly acquired employees into an existing ICHRA structure without the painful process of harmonizing group plans.

Implementation considerations for private equity firms

While ICHRA offers clear financial advantages, successful implementation requires attention to several factors:

Employee communication: Transitioning from group insurance to individual marketplace plans requires clear, proactive communication. Employees need to understand how ICHRA works, how to shop for plans, and what support is available.

Administrative support: Third-party administrators like Take Command handle employee questions, help with plan selection, and manage day-to-day administration so internal HR teams aren't overwhelmed.

State variations: Insurance regulations and marketplace offerings vary by state, which matters for companies with multi-state operations. Employers must ensure their ICHRA structure complies with regulations in each state where they have employees.

Timing: The transition typically happens at open enrollment, though special circumstances may allow for mid-year changes. PE firms should factor ICHRA evaluation into their value creation timeline, ideally well before a planned exit.

The bottom line for private equity

In private equity, value creation depends on managing every controllable cost while maintaining operational excellence. Health insurance has traditionally been a cost that felt uncontrollable—subject to the whims of insurance carriers and the health status of individual employees.

ICHRA changes that equation. By providing fixed, predictable benefits costs, ICHRA protects EBITDA from volatile renewals, eliminates the risk of reporting major cost increases during the sale process, and demonstrates financial discipline to potential buyers.

For PE firms with portfolio companies in home healthcare, retail, or other industries where traditional group insurance is particularly problematic, ICHRA offers a strategic advantage. The model reduces financial risk, improves employee choice, and creates the predictable cost structure that buyers value.

Want to learn more about how ICHRA can protect your portfolio company's valuation? Watch benefits consultant Kerry McArthur's full discussion on ICHRA and private equity, where she shares specific insights on using ICHRA to prepare companies for sale: Watch Kerry's ICHRA and Private Equity Discussion

References

1. McArthur, Kerry. "Private Equity, EBITDA and ICHRA." YouTube, 2025. https://youtu.be/3iv2Vb5eT1E
2. Hooper, Jack. "How to Control Healthcare Costs Throughout Your Portfolio With New Insurance Model." PE Professional, May 8, 2025. https://peprofessional.com/2025/05/how-to-control-healthcare-costs-throughout-your-portfolio-with-new-insurance-model/