The Dangers of P.E. and V.C.-Backed Health and Welfare Service Providers: Misaligned Incentives and the Impact on Employers and Employees
Justin Leader
CEO at BenefitsDNA | Advocate for Health Insurance & PBM Transparency | Go-Giver | Dad | #LeadersNeverQuit
The involvement of private equity (PE) and venture capital (VC) firms in the health and welfare brokerage industry (and other service providers) has raised concerns about the potential misalignment of incentives and the quality of advice provided to employer plan sponsors. As healthcare costs continue to soar, employers and their employees are facing the consequences of out-of-control health plan prices and out-of-pocket expenses. In this context, it is crucial to understand how PE and VC-backed brokerage firms and other similarly situated entities may prioritize their own financial interests over the well-being of employers and employees, and the importance of critically evaluating the advice provided by these firms.
PE and VC-backed health and welfare firms often prioritize their return on investment (ROI) over the interests of their clients. This focus on financial gains can result in advice that may not be in the best interest of employers and employees. Instead, recommendations may be biased toward products and services that generate higher revenues for the brokerage firm, irrespective of their impact on healthcare costs and quality for the employer and their workforce.
As a consequence of these misaligned incentives, firms may provide suboptimal advice to employer plan sponsors, leading them to adopt health plan options that do not adequately address the rising costs and out-of-pocket expenses faced by employees. This can result in employees struggling to afford necessary healthcare services and potentially experiencing financial distress due to unmanageable medical bills.
Employer plan sponsors, now considered fiduciaries under the Employee Retirement Income Security Act (ERISA), have a legal obligation to act in the best interests of their employees. This responsibility requires them to critically evaluate the advice provided by their health and welfare vendors and ensure that the recommended plan options genuinely serve the needs of their workforce. Failing to do so can expose plan sponsors to legal liability and damage their reputation as well as open them up to lawsuits by employees.
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To protect themselves and their employees, employer plan sponsors must be diligent in their selection of health and welfare service providers including their brokerage or advisory firms. This includes assessing the vendor's track record, understanding its fee structures, and identifying potential conflicts of interest that may arise from the firm's financial relationships. By choosing Covered Service Providers that prioritize the interests of employers and employees over their own financial gains, plan sponsors can better navigate the complex world of healthcare and provide their workforce with access to quality and affordable care. Laws have recently passed, which require all group health plan sponsors to request and attest regarding direct, indirect, and non-monetary compensation from all covered service providers, which should help them in accomplishing their mission of compliance.
The involvement of private equity and venture capital-backed firms in the health and welfare brokerage industry has led to concerns about misaligned incentives and the potential for bad advice. As healthcare costs continue to rise, employer plan sponsors must critically evaluate the guidance provided by their brokerage firms and ensure that the recommended options genuinely serve the needs of their workforce. However, it is also important to consider the potential positive impact that private equity and venture capital can have on the industry.
PE and VC firms can play a constructive role by providing capital and resources to drive innovation, improve efficiency, and enhance customer service within health and welfare vender partners. Their investments can help these entities leverage technology to deliver more personalized and data-driven solutions for their clients. Additionally, these firms can promote greater transparency and accountability within the industry, ultimately benefiting employers and employees alike. There are a few Covered Service Providers we know that fall directly into this category and are philosophically and financially aligned to the success of their customer as well as the end user. That is not the norm.
While there are valid concerns about the potential negative consequences of private equity and venture capital involvement in the health and welfare industry, it is essential to acknowledge their potential to drive positive change. By exercising due diligence in selecting an advisor and holding them accountable for their recommendations, employer plan sponsors (plan fiduciaries) can ensure they are working with partners that prioritize the well-being of employees and contribute to a more sustainable and equitable healthcare system.
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While I agree with the premise of your comments, I respectfully disagree with the blog post calling out PE & VC backed firms and questioning their motivations.? The fact is, this industry has been ripe for disruption for a long time.?I contend the lazy “renew as-is” days of "Two Plan Tonys" are done.?Those unfocused and unspecialized brokers will be history soon enough, because they don’t know what they don’t know.?For years they’d just dish out whatever the BUCA carrier renewal said, negotiate a few percent to look like a hero and move on.?I’m willing to bet that many can’t even spell the word Fiduciary, let alone know how to properly benchmark a renewal. It’s the forward-thinking specialist broker/consultants that are miles ahead, providing real value to the plan sponsor, of which many are now supported by large PE & VC backed firms.?These specialist advisors thrive on transparency, they come armed with choice, a deep tech stack and can navigate the industry’s shortcomings to offer the plan sponsor the best advice.?Industry disruption is here… and if the plan sponsor is on their toes, nobody will get lazy (with misaligned motivations.)
Director of Business Development
1 年Well said Justin and well-balanced information for all employers to know and understand.
Great blog post Justin — lots of information for employers to think about, and the stakes have never been higher. Health plan sponsors and administrators have always been ERISA fiduciaries. The new laws and rules help fiduciaries by giving them tools to actually be able to perform their fiduciary obligations but that comes with an increased risk of enforcement or litigation against plan fiduciaries that fail to use the new tools to (1) administer the plan prudently, ensure all plan costs and fees are reasonable and for the exclusive benefit of plan participants and beneficiaries and (3) monitor their plan service providers. The bottom line is that whether the services are PE backed, VC backed or BUCA backed, danger sbounds for health plan fiduciaries that continue on as usual. It is time for health plan fiduciaries to import mindfulness into health plan design and administration and use the information they are now granted access to (claims data, compensation info, drug spend, etc.) to rethink plan design and the advice offered by plan service providers.
?? Former Broker ?? Wisconsin's Sustainable Health Plan ?? Two First Names?? Packer Backer ??
1 年Spoken to a few fee-only financial advisors about this and they were shocked there weren't already measures in place for health plans.
Director, Business Development @ Premise Health | MBA | Veteran | Leader | Mentor
1 年A bad deal is a bad deal regardless of whether or not it is with a PE firm, VC-backed entity, or health system. Employers need to craft a deal structure that includes full transparency on costs, risks, & performance guarantees while ensuring that members are not adversely effected by engaging the services of the vendor partner. Absent that approach, fiduciary breach lawsuits are inevitable just as they were on the retirement side.