How the shifting employee/employer power dynamic is impacting the benefits biz
Brad Armstrong of Lovell Minnick Partners explores how changes in employee benefits are impacting investment and M&A activity.
The past year has been a difficult one for employers. They’ve struggled with furloughs and layoffs, closures and supply chain shortages, not to mention an ever-lengthening list of government regulations. Amid all of that chaos, the labor force has also faced its own challenges. The result? A fundamental change in the employer/employee relationship.
Employees have gotten a taste for greater autonomy and flexibility in their work. They’ve also gotten to see their employer show its true colors when responding to the pandemic. This has led many to seek out new career opportunities. Call it what you want: The “great reckoning,” the “great resignation,” the “great reset.” Whatever it is, it’s forcing employers to up the ante on benefits programs.
Related: Are you prepared for a new benefits model?
While we’ve written a fair bit about employees’ changing benefits preferences, we have talked much less about the impact these changes are having on vendors working in the benefits space. Brad Armstrong, a partner at private equity investment firm Lovell Minnick Partners, recently shared with us his take on the wider impact the pandemic will have on this market segment.
How has the work-from-home environment altered the employee benefits space?
With health and wellness taking center stage amid the global pandemic backdrop, benefits have become top-of-mind for employees and employers alike. In 2020, employees got more engaged in the enrollment process than perhaps ever before, taking a more deliberate approach to benefit selection. According to Willis Towers Watson’s 2019/2020 Global Benefits Attitudes Survey, 57% of employees said their benefits package were more important to them than ever before, and that was even before the pandemic began.
Employee engagement has remained strong this year, and employers have had time to take a more strategic approach to benefit program design for the upcoming plan year, which wasn’t practical last year as the pandemic was just unfolding. With industry participants now having had time to plan properly, they are able to embrace certain realities, such as the fact that certain benefits are simply less relevant in a work-from-home environment – for example, commuter savings plans – but certain benefits are more important, including things like childcare support, eldercare support, and wellness programs. In fact, a 2021 Care.com survey found that 98% of employers plan to newly offer or expand at least one employee benefit in response to the work-from-home environment and that 89% said that they are deprioritizing at least one type of employee benefit because of Covid-19.
What’s your outlook for the benefits space as more companies begin announcing their return-to-office date?
One of the most frequent topics of discussion and debate among leadership teams is how to navigate the return-to-office transition and where things will settle out in the workplace of the future. Flexibility around remote work will continue to be the most sought-after employee benefit, and one that will cause deep divisions as employers ultimately settle on policies, norms, and cultures going forward.
As companies make decisions on remote work, some employees will inevitably find themselves at odds with the approach, and some staff turnover will result. More recent initiatives like vaccine mandates and employee testing reimbursements will only exacerbate the issue.
Employers, already facing turnover challenges, will need to work harder to retain talent. After a year of not only sheltering in place but also sheltering in job, employees are departing their roles at a rapid clip. The “Great Resignation”, as it has been called, creates headwinds for employers trying to ramp up efforts as the economy continues to find its footing. While the lapsing of supplemental unemployment benefits and other pandemic-related government programs will likely improve labor market conditions, we’ve moved into a more employee-centric work environment, and we believe that’s likely to persist for some time.
What are some of the lasting implications of a more employee-centric work environment?
The pandemic blurred the lines between work and life, and benefits became not only an important employee recruiting and retention tool, but also a key ingredient in making sure employees remain healthy and productive. We’re hearing the wellness theme more frequently in our discussions with industry participants, and we believe there will be continued convergence between traditional health benefits and areas of financial services, including financial advice, retirement savings, and spending accounts.
We expect this convergence theme to only become more prominent, especially as we’re already seeing more strategic and M&A activity that more closely aligns retirement plan advice with benefits distribution, including at both the plan and participant levels. We think this is a trend that will continue beyond the initial return to work phase.
How is digital transformation changing the landscape for existing and emerging industry participants?
Digitalization is an enduring theme affecting all of our business and personal lives, and benefits is no exception. Facing an increased share of benefits costs, participants are looking for ready access to information and greater transparency into their benefits and the cost of healthcare. We want a high-tech experience where high-touch service remains accessible, and we need better solutions around patient access, pricing transparency, estimators, and other consumer-friendly tools.
While this trend was already underway, the pandemic forced us into a remote world and accelerated the digitalization of the end-to-end experience, particularly around enrollment. An increasingly digital experience creates a new playing field for information exchange, where it’s imperative that employers find ways to better communicate benefit coverage and value to employees. One step removed, we’ve also seen digitalization help address some of the key pain points in terms of interoperability between employers, payers, and providers. We believe that’s an important driver in the cost containment theme, reducing manual workstreams, redundancy, errors, and other inefficiencies among payers and providers, particularly as they work with an ever-increasing amount of complexity in plan design.
What is attracting investor interest in the employee benefits industry? Has investor interest shifted as a result of the employee-centric, WFH environment?
Multiple types of investors are attracted to the benefits industry. In many respects, it’s an intersection point for technology, health care, financial services, and business services, so sector specialist investors find unique angles to approach the space. Meanwhile, you have a rich set of disruptive, emerging, and mature business models, so there are flavors for venture, growth, and buyout equity investors, respectively. Investors see the same themes around digitalization, consumerization, complexity, compliance, and cost containment that dominate boardroom conversations, and investors see opportunities in addressing many of those trends.
The employee-centric trend and remote work environment forced sudden and lasting changes, and investors have taken note. We’re seeing significant investor interest in companies solving digital transformation needs for payers, providers, and employers, and some of the areas that seem to be attracting the greatest amount of investor interest include areas like self-funding, enrollment tools, distribution and administration technology, and interoperability solutions.
In some cases, the last year and a half caused temporary setbacks that investors can look past or “normalize” away, but in some instances, those changes are more lasting, and perhaps some are permanent. For example, an HSA plan administrator that derived most of its pre-COVID profitability from sweep revenue has seen a lasting erosion in revenue and earnings that investors won’t normalize away.
Conversely, a benefits brokerage that saw temporary revenue headwinds as a result of lower employment and higher lapse rates in 2020 feels more reversible. Across many areas of the benefits industry, investors have found opportunities to drive successful growth strategies – while COVID created challenges, we don’t think the growth opportunities are diminished, and investor demand will remain strong.
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