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Expanding Consumer Health Insurance Options by Easing the Boundaries Between Individual and Small-Group Markets

woman looks at paperwork in kitchen


  • Issue: Prior to the Affordable Care Act (ACA), policymakers typically aimed to keep the small-group and individual health insurance markets separate, because of their distinct market and regulatory conditions. The ACA, however, brought similar regulatory reforms to both market segments. Therefore, prior assumptions about “border crossing” merit reexamination.
  • Goals: Determine whether selective forms of crossing the border between individual and small-group markets might enhance consumer options without undermining regulatory goals.
  • Methods: Comparison of premiums between the individual and small-group markets, and public policy analysis of two options for crossing this market boundary.
  • Key Findings and Conclusions: Whereas initially under the ACA, unsubsidized premiums in the individual market were much lower than in the small-group market, now premium levels are much more similar. But because market conditions can vary substantially by location, consumer options could be enhanced by providing select opportunities to cross this market border in either direction. Self-employed individuals might find better unsubsidized prices as a “group of one” in the small-group market. Or small firms might be able to provide lower-cost coverage by subsidizing workers’ purchase of individual insurance. Policies that ease these market boundaries without substantially harming market conditions may be valuable.


Now that the Supreme Court has rejected the third attempt to strike down the Affordable Care Act (ACA), the law’s basic structure appears to be secure, yet deficits remain. Efforts at more fundamental enhancements, such as a public option, so far have stalled. Therefore, policymakers are currently considering more incremental measures to expand coverage and improve the affordability of private health insurance.1 Among these are policy changes that lower the boundaries between the three segments within the commercial health insurance market:

  • Individual
  • Small group: employers with up to 50 workers (up to 100 in California, Colorado, and New York)
  • Large group: employers with more than 50 workers (more than 100 in California, Colorado, and New York).

Distinctive regulatory rules have evolved for each segment, as policymakers have aimed to maintain “borders” between the markets (Exhibit 1).2


Until recently, many policymakers thought it was important to keep these market borders distinct to prevent opportunistic “border crossings” that exploit regulatory gaps and loopholes. To avoid consumer protections thought to impose excess cost, some individuals have tried banding together to purchase as a group, but that has exposed them to financial mismanagement or fraud.3 Or, in the past, employers have tried to lessen the cost of group coverage by carving out individual workers with costly health conditions and offering them skimpier coverage designed for the nonemployment market.4 Accordingly, regulators have had to prohibit and police such border-crossing strategies.5

Under the ACA, however, the individual versus small-group distinction is now much less important than previously. Prior to the ACA, individual coverage was entirely unsubsidized. Coverage was kept more affordable by restricting coverage for people with preexisting conditions and offering others more limited benefits. To remedy the resulting inadequacy in coverage, the ACA imposes on the individual market, and strengthens for the small-group market, the same basic set of rules that most states had previously created for the small-group market: no one can be turned down, coverage must be fairly comprehensive, and rates must be based on community averages. Further, to make individual coverage more affordable, the ACA created sliding-scale premium subsidies.

Certainly, important differences remain between the individual and small-group markets. For instance, the small-group market has continuous open enrollment whereas enrollment in the individual market is limited to designated periods, usually just once a year.6 Also, small-group insurance is often based on broader provider networks than in the individual market.

These differences aside, it is no longer the case that an employee would receive inferior coverage if relegated to the individual market. Nor would an individual encounter a substantially different set of market rules and conditions by moving to the small-group market. The major difference remaining is simply the price of insurance. To better understand these price differences, we conducted an analysis of insurers’ financial reports and rate filings with the federal government. Specifically, we analyzed unsubsidized premium rates in 2021 for identical levels of coverage that insurers offered in both the individual and small-group markets to understand how prices might compare in certain market settings.

Key Findings

Initially following Affordable Care Act implementation, strong competition resulted in individual coverage premiums being surprisingly low — often substantially lower than premiums for equivalent coverage in the small-group market. Because insurers had underestimated the medical needs of new enrollees, they then had to substantially increase rates to levels higher than small-group rates, which had increased more moderately. Most recently, however, individual insurers realized they had overcorrected and so premiums have leveled off.7 With small-group premiums continuing to increase in pace with medical costs, the prices in the two market segments now resemble each other much more than in the past (Exhibit 2).8


To better understand how prices might compare in particular market settings, we conducted an apples-to-apples analysis of unsubsidized premium rates in 2021 for identical levels of coverage that insurers offered in both the individual and small-group markets. Based on the availability of data — and to ensure that the compared plans were virtually identical — we limited this analysis to eight states with small-group exchanges operated under the ACA (known as SHOP exchanges, for the Small Business Health Options Program).9 Accordingly, these results should be viewed more as a convenience sample that illustrates a range of possible conditions in other states rather than as a reliable representation of nationwide averages or typical conditions.

Using silver-plan rates from the largest county in each state with available rate data, we calculated the enrollment-weighted averages (Exhibit 3). This example is for a single 30-year-old. Amounts for other ages or family compositions will vary, but because demographic adjustments are uniform across these markets, proportionate differences remain the same regardless of age or family composition.


This rate comparison varies based on idiosyncrasies across these sampled states. In half, individual premium rates are substantially higher (18%–67%) than small-group rates, but in half, individual rates are either lower (֪–15%) or fairly similar (2%–10% more). Moreover, such comparisons are likely to change from year to year.10 And, even when one market does not have a clear price advantage over another, people able to shop in both markets have more choice of plans. Accordingly, consumers’ options would likely be maximized if they could cross the individual/small-market boundary in either direction — so long as that would not harm the integrity of market rules.

Increasing Consumer Options Without Harming Market Conditions

The previous two sections illustrate how market rules and market conditions between the small-group and individual segments have become more closely aligned. We next examine policy options that could permit more “border crossing” between the two segments as a possible means to increase consumer options.

One option is to allow people who are eligible for employer coverage to purchase individual coverage instead through the subsidized exchanges.11 Other options also could help people who do not qualify for ACA subsidies, based on their income levels or citizenship status. Should employers be allowed, for instance, to subsidize workers’ purchase of individual insurance with pretax compensation? Or should self-employed individuals be allowed to purchase group coverage as a “group of one?” Under either option, subscribers would not be allowed to combine both the tax benefits of employer sponsorship and the ACA’s sliding-scale premium subsidy. But for those who are not eligible for substantial ACA subsidies, it might make good sense to allow them to compare options between the two market segments.

The primary objection to border crossing is adverse selection. Depending on market conditions, subscribers in either market segment might be concerned if large numbers of those in the other segment with greater medical needs were to cross over, driving up community-rated prices. However, one high-level indication that lowering the individual/small-market boundary is not fundamentally harmful is that two states (Massachusetts and Vermont) have chosen to merge their individual and small-group markets, and two others (Maine and North Dakota) are either considering this or planning to do so.12 Data from the two merged-market states indicate that despite entering the market reform era with somewhat higher rates, the combining of each state’s risk pools has not resulted in small-group claims increasing at a noticeably different rate than the national average (Exhibit 4).


Selective border crossing raises different concerns than a wholesale market merger. If selective crossing is done strategically to take advantage of different market rules, the results could weaken or undermine those rules. Two particular measures, however, appear to lower fences without risking significant adverse selection. The first is allowing self-employed individuals to purchase small-group coverage as a “group of one.” The second is to allow small employers to subsidize workers’ purchase of individual insurance through health reimbursement arrangements (HRAs). We discuss each in turn.

Group-of-one rule. Prior to the ACA, 16 states allowed self-employed individuals to purchase group coverage through their sole proprietorships, denominating these as “groups of one.”13 The ACA, however, defined groups as having at least two independent members (e.g., owner plus an unrelated employee). Most or all of these states changed their small-group rules to conform with the federal definition, but Virginia expanded small-group coverage to include the self-employed as a way to provide more affordable options.14 Also, a few states (e.g., Iowa, Texas, and Utah) loosened the ACA’s owner-plus-employee requirement for group status to include so-called mom-and-pop businesses, in which the only employees are the owners themselves.15 Some brokers report that this flexibility is helping self-employed people find “more affordable [or] generous coverage.” In addition to price, another potential advantage of small-group coverage is that it often offers broader provider networks, such as preferred provider organizations (PPOs), rather than only health maintenance organizations (HMOs).

The only concern that has been raised about returning to, or adopting, a group-of-one rule for the small-group market is that doing so conflicts with the ACA and thus might be beyond state authority.16 One solution to that problem is for Congress to amend the ACA. Pending that, however, the Virginia Bureau of Insurance ruled that its group-of-one rule does not contravene the ACA because it expands rather than contracts small-group options, and so far federal authorities have not objected.17 Thus, this option appears to be readily available to states.

Health reimbursement arrangements. HRAs are tax-sheltered accounts through which employers can subsidize workers’ health-related expenses without those subsidies counting toward workers’ taxable income. If employers earmarked HRA funds for health insurance premiums, then workers could purchase individual coverage with pretax rather than after-tax funds, producing a substantial discount equivalent to each worker’s federal and state tax bracket, plus payroll taxes. Initially, however, federal agencies prohibited this arrangement, out of concern that employers who previously were offering health insurance would dump their workers onto the subsidized individual exchanges. Congress adopted a solution to that problem, though, with a 2016 enactment that allowed qualified small employer HRAs (QSEHRAs) under limited conditions.18 QSEHRAs cannot be offered selectively to only some employees, and the employer’s contribution reduces pro rata any premium subsidy a worker might be eligible for through the ACA exchange.

So far, QSEHRAs have received only limited uptake. One reason is their complexity.19 QSEHRAs differ from conventional HRAs, which themselves differ from flexible spending accounts (FSAs, also known as cafeteria plans) and health savings accounts (HSAs). Understanding, navigating, and administering all of these different employee benefit arrangements can be daunting, especially in view of the additional requirements imposed by the Employee Retirement Income Security Act (ERISA), the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), and the Health Insurance Portability and Accountability Act (HIPAA).

Moreover, QSEHRAs were followed by a similar but distinctive HRA version known as individual-coverage HRAs (ICHRAs), created by a 2019 regulation.20 ICHRAs accomplish the same basic goal of QSEHRAs but are available to employers of any size. Because ICHRAs were created by regulation rather than statute, however, they are subject to a somewhat different set of constraints. And, because ICHRAs reduce market boundaries between the large-group and individual markets, they raise different public policy concerns than QSEHRAs.21 For instance, because larger groups are not subject to the same community rating rules that govern the individual market, allowing larger employers to fund individual insurance through HRAs could lead to some degree of adverse selection.


Interest is growing in policy options to ease boundaries between the individual and small-group markets. Self-employed individuals who do not qualify for subsidized insurance could benefit from being able to purchase group insurance as a group of one. Or small firms with workers who might qualify for federal subsidies could provide more affordable coverage choices by helping workers to purchase individual coverage. Moreover, bringing more employer-subsidized purchasers into the individual market could stimulate more innovation and competition between insurers.

For small businesses to take full advantage of these opportunities, however, tax and regulatory rules need streamlining and simplification. The time may be right to rethink and redesign these policies in a way that avoids regulatory strictures designed to address problems that no longer exist.

  1. Stephanie Armour, “Democrats Lower Their Sights on Healthcare Changes,” Wall Street Journal, May 22, 2021; and Katie Keith, The Affordable Care Act in the Biden Era: Identifying Federal Priorities for Administrative Action (Commonwealth Fund, May 2021).
  2. Mark A. Hall, “The Geography of Health Insurance Regulation,” Health Affairs 19, no. 2 (Mar./Apr. 2000): 173–84.
  3. Kevin Lucia and Sabrina Corlette, Association Health Plans: Maintaining State Authority Is Critical to Avoid Fraud, Insolvency, and Market Instability (Commonwealth Fund, Jan. 2018).
  4. Amy Monahan and Daniel B. Schwarcz, Saving Small Employer Health Insurance, Minnesota Legal Studies Research Paper No. 12-36 (University of Minnesota Law School, Aug. 2012).
  5. Timothy S. Jost, “Loopholes in the Affordable Care Act: Regulatory Gaps and Border Crossing Techniques and How to Address Them,” St. Louis University Journal of Health Law & Policy 5, no. 1 (2011): 27–56; and Mark A. Hall et al., “HealthMarts, HIPCs, MEWAs, and AHPs: A Guide for the Perplexed,” Health Affairs 20, no. 1 (Jan./Feb. 2001): 142–53.
  6. Another notable difference is that small-group coverage is purchased with pretax dollars whereas individual coverage does not automatically receive advantageous tax treatment (beyond the premium subsidies, which are administered through the tax system). For the proposals we consider, however, that difference would be eliminated. Self-employed people already may buy individual insurance with pretax dollars, and health reimbursement arrangements (HRAs) are pretax vehicles for small employers to pay for individual coverage.
  7. Rachel Fehr, Daniel McDermott, and Cynthia Cox, Individual Insurance Market Performance in Early 2020 (Henry J. Kaiser Family Foundation, July 2020).
  8. Sabrina Corlette et al., The Impact of the COVID-19 Pandemic and Recent Federal Policies on Small Business Health Insurance (Urban Institute, Aug. 2021); Michael J. McCue and Mark A. Hall, “How the Small-Business Health Insurance Market Is Faring,” To the Point (blog), Commonwealth Fund, Apr. 22, 2020; and Fehr, McDermott, and Cox, Individual Insurance, 2020.
  9. SHOP Exchange,”
  10. In the near term, one important factor likely to affect comparisons between these two market segments is the enhanced premium subsidies made available through the American Rescue Plan Act (ARPA) for 2021 and 2022. In particular, these subsidies no longer phase out at 400 percent of poverty. That change will likely bring additional subscribers into this market and could change a small employer’s calculus about whether small-group versus individual coverage is superior overall. At present, it is unknown whether this temporary change will become permanent. See Karen Pollitz, How the American Rescue Plan Will Improve Affordability of Private Health Coverage (Henry J. Kaiser Family Foundation, Mar. 2021).
  11. Jesse C. Baumgartner, Sara R. Collins, and David C. Radley, Removing the Firewall Between Employer Insurance and the ACA Marketplaces: Who Could Benefit? (Commonwealth Fund, Dec. 2020).
  12. Vermont split (unmerged) its small-group and individual markets for 2022 to take fuller advantage of temporarily enhanced subsidies under the ARPA for the individual market.
  13. Small Group Health Insurance Market Guaranteed Issue,” Henry J. Kaiser Family Foundation, 2013.
  14. Louise Norris, “Virginia Health Insurance Marketplace: History and News of the State’s Exchange,”, Aug. 16, 2021.
  15. Sabrina Corlette et al., Perspective from Brokers: The Individual Market Stabilizes While Short-Term and Other Alternative Products Pose Risks (Urban Institute, Apr. 16, 2020).
  16. Additional concerns exist, however, for allowing self-employed individuals to join large-group “association health plans.” See Katie Keith, “The Association Health Plan Proposed Rule: What It Says and What It Would Do,” Health Affairs Blog, Jan. 5, 2018; Kevin Lucia et al., “In the Wake of New Association Health Plan Standards, States Are Exercising Authority to Protect Consumers, Providers, and Markets,” To the Point (blog), Commonwealth Fund, Nov. 27, 2018; and Louise Norris, “The Problem with Association Health Plans,”, June 1, 2018.
  17. Commissioner of Insurance, Commonwealth of Virginia, Administrative Letter 2018-04, June 4, 2018.
  18. Qualified Small Employer HRA (QSEHRA),” PeopleKeep, n.d.; and Joanne Sammer, “QSEHRAs Help Small Employers Solve the Health Care Coverage Puzzle,” Society for Human Resource Management, May 2019.
  19. See Corlette et al., The Impact of the COVID-19 Pandemic, p. 12 (“Most respondents said individual coverage HRAs are too complicated for employers to easily make the shift from group coverage.”); see also Corlette et al., Perspective from Brokers, p. 9 (“. . . brokers pointed to the complicated tax and [ERISA] compliance obligations associated with offering [individual-market HRAs], as well as the operational complexity and need for extensive employee education.”).
  20. Individual Coverage HRA (ICHRA), PeopleKeep, n.d.
  21. Peter Newell, Trump Administration Health Reimbursement Arrangements Put ACA Subsidies at Risk for Low-Income Workers (United Hospital Fund, Oct. 2020); JoAnn Volk and Kevin Lucia, “Federal Rule Creating New Health Coverage Option for Employers Could Destabilize the Individual Market,” To the Point (blog), Commonwealth Fund, July 24, 2019; and Christen Linke Young, Jason Levitis, and Matthew Fiedler, Evaluating the Administration’s Health Reimbursement Arrangement Proposal (Brookings Institution, Dec. 2018). Similar concerns exist for the aspect of the Trump administration’s rule on association health plans that would allow self-employed individuals to join the large-group market. See Keith, “Association Health Plan Proposed;” Lucia et al., “In the Wake of New Association;” and Norris, “Problem with Association.”

Publication Details



Mark A. Hall, Fred D. & Elizabeth L. Turnage Professor of Law, Wake Forest University School of Law

[email protected]


Mark A. Hall and Michael J. McCue, Expanding Consumer Health Insurance Options by Easing the Boundaries Between Individual and Small-Group Markets (Commonwealth Fund, Oct. 2021).