TPG joins Blackstone's healthcare initiative

TPG is the first private equity firm to merge its portfolio companies into Blackstone’s new healthcare purchasing consortium, Equity Healthcare.

The Blackstone Group will now allow other private equity firms to enroll their portfolio companies in Equity Healthcare for a cost of $2.25 per employee per month, a price point which is likely to go down and include additional services as the purchasing pool increases.

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The deal marks a major step in the institutionalisation of private equity. Today a growing number of firms are seeking to provide cost-cutting resources to their portfolio companies, typically through an effort centralised at the firm and overseen by dedicated professionals. Traditionally improvements at the portfolio level were overseen on a deal-by-deal basis, often by the general partner who sourced and led the initial investment.

These highly staffed, custom clinical models for which we provide the oversight tend to beat medical trends by three points on claims.

Alan Muney

With TPG coming on board, the Equity Healthcare programme will include 28 portfolio companies, 24 of which come from Blackstone, with 125,000 employees and a total of around 260,000 members including dependents, according to Alan Muney, a former executive and chief medical officer at Oxford Health Plans and United Healthcare. Muney was brought on board by Blackstone to create the programme in 2007.

Muney said he negotiated contracts with Aetna and Anthem Blue Cross and Blue Shield with an eye toward receiving the type of service and staffing normally received by large corporations like UPS or Bank of America. The number of employees already enrolled makes Equity Healthcare currently Aetna’s fifth-largest customer. The company is Anthem’s ninth-largest customer.

While TPG is the first private equity firm to publicly join the consortium, Muney said around half a dozen other firms have expressed an interest. At the recent PEI Strategic Financial Management Conference in New York, several CFOs discussed the importance in the current economic environment of reducing costs and getting better rates by leveraging the combined power of portfolio companies.

Blackstone estimates that Equity Healthcare will save the portfolio companies involved $50 million in 2009, and potentially up to $150 million next year. Calculating such potential savings has proven difficult for some other firms in the past, including estimating how much it would cost each new company to have joined some other plan. But Muney said Blackstone’s savings are based on a medical cost trend target that is about three points better than market trends.

“Aetna and Anthem have to beat medical trend rates or the portfolio companies keep all the [Administrative Services Only] fees – those are the self-funded administration fees that the health plans charge,” Muney said. “These highly staffed, custom clinical models for which we provide the oversight tend to beat medical trends by three points on claims, which is the incentive for these two companies.”

– additional reporting by Kevin Ley