The Individual Health Insurance Market Is Looking More Like the Group Market Under the Affordable Care Act

The Affordable Care Act’s (ACA’s) insurance reforms aimed to create a set of favorable market conditions to help the small-group and individual markets perform more like the well-functioning large-group market. Thus one way to measure the effectiveness of the ACA’s reforms is to observe the extent to which these market segments have converged in terms of profitability and premiums or have continued to differ on such measures. In this post, we consider whether the three market segments report similar — or substantially different —financial performance during the first four years of the ACA.

Bringing Large-Group Performance to the Individual and Small-Group Markets

The large-group segment has, for many reasons, always been seen as an effective market: coverage is relatively comprehensive; insurers accept all applicants; the risk pool is diverse because people are covered by virtue of their employment; overhead costs per person are comparatively low; premiums are highly subsidized; and everyone in a group is charged the same amount. Prior to the ACA, the individual and small-group markets lacked some or all of these features, to varying degrees.  

A core aim of the ACA’s market reforms was to bring these favorable features to the individual and small-group markets. It did so by requiring coverage of essential health benefits, banning medical underwriting, setting minimum medical loss ratios, subsidizing premiums, and requiring age-adjusted community rating. Although these increase the unsubsidized costs of insurance, they create market conditions that provide more coverage and consumer protection. This tradeoff produces social benefits as long as they are achieved without greatly exceeding large group premiums, or without causing large losses for insurers.

One way, then, to see how well these market reforms have worked is to observe whether financial conditions among these market segments have converged. To do so, we assembled financial performance data for each market segment over six years, with information coming from insurers’ financial reports to the federal government. This view provides only a rough, yet instructive, gauge of how the ACA’s market reforms have worked.

How Are the Market Segments Performing?

Looking first to average premiums and medical claims, the small- and large-group markets began and ended the 2012–17 period at levels very similar to each other. However, the individual market experienced sharp increases, driven by major changes in the ACA. The law opened this market segment up to people with significant health conditions and made coverage much more comprehensive.

Despite these large increases, at the end of 2017, the individual market remained well aligned with the small- and large-group markets in terms of premiums and medical claims. After the initial jump in medical claims in 2014 when all of the ACA’s reforms took effect, claims expenses in the individual market leveled off to modest increases similar to — and actually a bit less than — those in the group markets. This relative stability was achieved prior to changes that the Trump administration made to market rules, which are not reflected in these data.

When we look at health insurers’ profitability, there have been substantial changes in the individual market compared with the relatively steady small- and large-group markets. After full reform took effect in 2014, small-group insurers’ bottom lines took a small hit but remained profitable overall and by 2017 had regained the profitability they had prior to reforms.

The individual market reacted more sharply. Because of steep increases in their medical loss ratios, insurers incurred substantial losses for individual coverage during the first few years of the ACA. However, pricing corrections in 2017 brought profits that year up to what was seen in the small- and large-group markets. In fact, in terms of profitability, the individual market performed better than it did before the ACA. This more sustainable pricing has resulted in premiums that are very close to those for small- and large-group policies.

This high-level account obscures important differences. Prices and profitability can vary widely across states, based on differences in market conditions and regulatory implementation. Also, within the individual market, there are significant differences between plans that are and are not ACA-compliant. Finally, although premiums, claims, and profits are very similar among market segments, there are differences in coverage levels because bronze plans are more prevalent and gold plans less prevalent in the individual than the group markets.

Nevertheless, the view from this vantage point depicts much more market convergence than divergence, at least through 2017. It remains to be seen whether this relative stability will persist following increased availability of plans that are not compliant with the ACA in the individual and small-group markets and judicial challenges to the ACA’s constitutionality.