Starting in 2014, the Patient Protection and Affordable Care Act (ACA) established reforms applicable to the individual and small group health insurance markets. These reforms enhanced health-insurance access through financial subsidies and by prohibiting insurers from denying coverage or raising premiums based on preexisting health conditions. Members of RTI International and the Center for Consumer Information and Insurance Oversight (CCIIO) conducted analyses to determine health risk and costs in the three largest private insurance markets: the ACA individual market, the ACA small group market, and the large employer market to illuminate the health status and costs for enrollees in these new ACA markets compared to the larger and more established large employer market.

Under the ACA, the small group market comprises employers with up to fifty employees; the individual market offers health insurance to individuals not affiliated with a group. The large employer market provides health insurance coverage to employees and their dependents through a group health plan maintained by a large employer.

The ACA reforms primarily targeted the individual and small group markets, making the large employer market, which was mostly unaffected, a good comparison group. ACA financial assistance does not extend to the small group market, and most states already had existing small group markets similar to those mandated under the ACA. Therefore, enrollment and costs in the ACA small group market have remained fairly consistent compared to pre-ACA. The ACA individual market has seen the most volatility—specifically—declining enrollment and increasing premiums. A myriad of factors have contributed to this volatility, most notably the reality that new individual market enrollees tend to be lower income and sicker than enrollees from the pre-ACA individual market. Nearly half of all individuals in the 2017 ACA individual market received cost-sharing subsidies, meaning income was below 250% of the federal poverty line.

The RTI CCIIO study compared metrics of health risk and cost across the three private insurance markets. Results showed that health risk is not uniform across the three markets. ACA small group market enrollees had a 3% lower health risk compared with large employer market enrollees, and ACA individual market enrollees had 20% higher health risk than enrollees in the large employer market. The main driver of these disparities in health risk is likely the prevalence and severity of medical conditions. Adults in the ACA small group market have fewer and less severe medical conditions compared to adults in the two other markets.

After adjusting for these differences in health risk, enrollees in the ACA individual market had 27% lower health care costs than enrollees in the large employer market. Enrollees in the ACA small group market had 12% lower PMPM allowed charges than enrollees in the large employer market. This means the individual market enrollees had the lowest risk-adjusted healthcare costs on average, followed by enrollees from the small group market, with the large employer market enrollees being the most expensive on average given their health risk.

It is perhaps surprising that individual market enrollees have lower health care costs, even without adjusting for their higher health risk, than enrollees in the large employer market. A possible explanation is that enrollees in the ACA individual market tend to have lower incomes and enroll in less generous health plans. Enrollees in plans with higher cost-sharing tend to use less health care services than enrollees in plan with lower cost-sharing, all else equal. Enrollees in plans with narrower networks also tend to use less health care services. And these effects may be exacerbated among enrollees with lower incomes.

The ACA individual market enrolls sicker individuals, on average, compared with the two group markets. However, these sicker enrollees do not incur higher health costs—they actually incur the lowest risk-adjusted costs. Lower-income enrollees in the ACA market generate particularly low costs conditional on health risk. Narrower plan networks and increased enrollee cost-sharing among individual market plans may substantially reduce costs relative to traditional private insurance. Whether this is desirable or not is not yet clear. A potential concern is that narrower plan networks and higher cost-sharing may reduce the value of coverage and the health outcomes of their enrollees. Future exploration of health outcomes for the ACA markets would be particularly useful to help policymakers evaluate this trade-off.