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How Choices in Exchange Design for States Could Affect Insurance Premiums and Levels of Coverage

The Issue

The Affordable Care Act gives states the authority to create health insurance exchanges, which will serve as marketplaces for purchasing insurance in the individual and small-employer markets. States will have considerable flexibility in designing and implementing these exchanges. With support from The Commonwealth Fund, researchers from the Urban Institute simulated the implications of various design choices, including whether to: merge the small-group and individual insurance markets or keep them separate; eliminate age rating; remove the small-employer tax credit; and define "small group" as an employer with 100 or fewer workers or one with 50 or fewer workers.

What the Study Found

  • Merging the small-group and individual markets. Merging the markets will lead to a substantial decline in individual premiums, by more than 10 percent inside the exchange and by somewhat less outside the exchange. Premiums in the small-group markets would be largely unchanged. The merge would result in 1.7 million more people nationwide participating in the exchanges and approximately 1 million more people being insured.
  • Eliminating age rating. Eliminating age rating—which would require plans to charge all adults the same premium for the same coverage, regardless of age—would increase premiums for younger adults while lowering them for older adults. As a result, the number of uninsured older adults would decline by about 1 million, with the decrease offset by a larger number of uninsured younger adults.
  • Eliminating the employer tax credit. Eliminating the credit creates little effect on overall insurance coverage. It reduces the number of people purchasing coverage though the employer exchange by about 500,000, with a similar increases in the number obtaining employer-based coverage through small firms outside the exchange.
  • Defining "small group." Changing the "small group" definition has relatively little impact on the number of people covered through the exchange, largely because firms with 50 to 100 employees are unlikely to achieve significant administrative savings from the exchanges. 


Merging the small-group and individual markets has the greatest positive impact on coverage and potential to lower costs. The other exchange design options studied should not dramatically affect costs and coverage, leaving states free to make choices based on local support and preferences.

Publication Details



F. Blavin, L. J. Blumberg, M. Buettgens et al., "How Choices in Exchange Design for States Could Affect Insurance Premiums and Levels of Coverage," Health Affairs, Feb. 2012 31(2):290–98.