Preheat oven to 350°. Spray a 2 1/2 quart baking dish with nonstick cooking spray.
In a large skillet, cook sausage over medium heat, stirring occasionally, until browned, about 5 minutes. Set sausage aside. Wipe skillet.
In same skillet, melt butter over medium heat. Whisk in flour until smooth. Gradually whisk in milk; bring to a boil, whisking until slightly thickened, about 7 minutes.
Stir in 1 cup American cheese, Cheddar, salt, paprika, and peppers until smooth. Stir in cooked macaroni and sausage; spoon into prepared dish.
Top with remaining 1/2 cup American cheese.
Bake until bubbly and cheese melts, 18 to 20 minutes.