While 2013 was the year of private exchanges for large employers, the real sweet spot for the defined contribution model could still be ahead in the smaller employer realm.

At a panel at the Workplace Benefits Transitions conference in Chicago on Dec. 11, Booz & Company analysts said that so far, the larger employers taking advantage of private exchanges don’t have as much to gain as their smaller counterparts that haven’t been as quick to adopt the concept.

“For smaller employers, the value proposition is stronger than large, which is not where we see demand today,” said Kris Weber, principal at the New York City-based consulting firm, at the event sponsored by EBA’s parent company, SourceMedia. “We’ve yet to see a lot of uptick where the value proposition actually is.”

Weber and his colleague Akshay Kapur, a principal in the firm’s Chicago office, outlined that for smaller employers, the value proposition for being on a private exchange is high because you can “aggregate demand, which smaller employers don’t have … [but] as part of an exchange, an exchange can do that on their behalf and it results in better pricing because it’s pooled,” Weber said at the panel.

The two also noted that the exchange reduces administration costs, leads to insurance company competition and commoditization for these smaller policy holders. 

“I would position that more action has taken place with the larger employers because the private exchange market is being driven by very large benefit consultants and brokers with large clients … so it makes sense they’d go after their current clients,” Kapur said in a follow-up phone interview following the conference.

He noted, however, that there are benefits to large employers on exchanges. Especially where “they can cap their contribution” to employees and control spending. But the disadvantages — for example Aon Hewitt’s exchange moves self-funded large employers to fully insured programs, thus adding taxes and fees — definitely outweigh those for small employers, he said. Further, smaller employers are less likely to be self-funded and more likely to have held the same policy with the same insurance company for many years at the same price.

Why Towers bought Liazon

“In years to come, we will see private exchanges spreading to all segments of the employer market. And I think Towers Watson agrees with us, which is why they bought Liazon, a small employer private exchange,” Kapur said.

“In the next two years, you’ll find a lot of smaller brokers getting educated and then brokers passing it on to employers.”

Todd Van Tol, partner at management consulting firm Oliver Wyman, was also on the mid-December panel and agreed with Booz analysts that the potential for private exchanges has only just begun.

“The potential for growth in terms of the amount of people on private exchanges, our projections significantly outstrip the amount in the public exchanges,” the Chicago-based consultant said. 

Kapur noted that when his analysis refers to smaller employers they are defined as companies from around 100 lives up to about 1,000 lives. This is contrary to the Affordable Care Act, which defines small employers as 50 lives and less.

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