Health-care law could unleash entrepreneurs


In 2014, online health-insurance marketplaces called exchanges are supposed to be up and running in each state, offering private policies at reasonable rates to the uninsured . (Kiichiro Sato/AP)
July 30, 2011

One character in the novel was a milliner who made fashionable hats in a home studio. A second was helping get a neighborhood newspaper off the ground. A third quit her job at Sotheby’s and bet her savings on what she had always wanted to do: open a vintage clothing store. I kept wondering, “Why aren’t these people obsessing about health insurance?”

Then, it dawned: The story was set in London, where there’s universal coverage. No one there has to make life decisions based on getting or keeping insurance.

This will be true for almost all Americans in 2014, if the Affordable Care Act is not repealed or unraveled in court. That’s when online health-insurance marketplaces called exchanges are supposed to be up and running in each state, offering private policies at reasonable rates to the uninsured — regardless of their medical histories — with subsidies available to help low-income buyers.

The Department of Health and Human Services this month released guidelines on how to set up exchanges, and more than half the states already are taking steps to build them. Once they’re up and running, you’ll be able to quit your job at Large Company X and start that plumbing or carpentry business, that mom-and-pop restaurant or barbershop, without putting your family’s health or finances at risk. You can open that dance studio, play in that band, live off savings while you write or paint or launch the tech venture that could make you the next Bill Gates or Mark Zuckerberg.

There’s nothing more American than starting a business. Yet contrary to our self-image, most developed countries have larger small-business sectors than the United States does. The Affordable Care Act could help close the gap — and spur the economy — by removing an obstacle to business creation and self-employment.

“Most start-ups don’t succeed, but the few that do are the growth engines for the whole economy,” said John Harthorne, chief executive of MassChallenge, which runs an annual international start-up competition and offers other help to start-ups. “Imagine that Facebook didn’t get started for want of health insurance. If just one company happens to be a billion-dollar success story, that has a major effect on the economy.”

Republican presidential hopefuls have vowed to repeal what they call “job-killing Obamacare,” and conservative judges are questioning whether parts or all of the law are constitutional. The debate is sprawling and fierce — over its fines for people who don’t buy insurance, its new government regulations, its expensive Medicaid expansions and insurance subsidies, and its mechanisms for curbing the future growth of health costs.

So here’s a point that President Obama and other Democrats who struggled to enact the controversial law might have trumpeted more loudly: It’s good for entrepreneurs, which is good politics. It’s hard to oppose creativity, innovation and the potential for a new generation of risk-takers.

U.S. lagging behind

The liberal Center for Economic and Policy Research (CEPR) triggered debate with a 2009 analysis of small-business data from 21 economically advanced countries. The study, based on data from the Organization for Economic Cooperation and Development (OECD), ranks the United States near the bottom in terms of the proportional size of our small-business sector. The authors cite the patchwork U.S. health-insurance system as one plausible reason for the disparity.

Some economists say other forces are also in play. Princeton University’s Paul Krugman, for instance, says it’s possible that some European companies stay small “to avoid onerous regulations” on larger companies.

William Kindred Winecoff, a PhD candidate at the University of North Carolina, says that stiffer competition might kill off more small businesses in the United States and that Europe might offer opportunities for more niche businesses serving ethnic groups.

Scott Shane of Case Western Reserve University has noted that fewer people are self-employed in richer countries. However, none of the economists discount health insurance as a possible obstacle to starting a business.

Senior CEPR economist John Schmitt, lead author of the analysis, said the OECD statistics even represent a best-case scenario for the United States (for instance, each branch of McDonald’s is classified as a small business) and yet, we are scraping bottom.

“There’s a bit of a smoking gun with health insurance,” Schmitt said. “That’s the one thing that’s uniquely different.”

Tantalizing bits of research back up his conclusion. Some studies have found that job lock — people who don’t change jobs for fear of losing health insurance — reduces voluntary turnover by 25 percent. How many of those people would quit to start their own businesses if they didn’t have to worry about insurance?

At least two studies have found that people whose spouses have health insurance are more likely to start businesses. The most recent, a RAND study published last fall, found that 4 percent of all men earning wages or salaries start a business. For those with employer health insurance, the rate was 2.9 percent. Among those with insurance through a spouse, the rate was 6.6 percent.

The RAND study also found that the business-ownership rate among men rises in the month they turn 65 and can rely on Medicare. The rate doesn’t change in birthday months at any other age between 55 and 75.

“It appears that what’s happening is that when they qualify for Medicare, they decide it’s a good time to start a business,” said economist Robert Fairlie, one of the authors. “One of the big constraints to starting a business is gone. They know they’ll have health insurance.”

Unleashing entrepreneurs

Parts of the Affordable Care Act, such as employer coverage requirements that kick in at 50 employees and penalties for not providing coverage, could stifle innovation and company growth, economists say.

Robert Litan of the Brookings Institution shares those concerns, but he said the new law should nevertheless be a net positive for entrepreneurship.

Research shows the most successful entrepreneurs are 38 or 39, he said. They probably have a spouse and kids, and they’re old enough to have pre-existing conditions. So if they’re considering leaving their job to start a business and realize they can’t get health insurance, “that is going to be a huge deterrent,” he said.

The Obama administration occasionally notes that the new health law will liberate people to start businesses. For instance, “Increases Health Care Security to Unlock Entrepreneurship” was No. 4 on a list of ways the law would help small business. But the White House declined to provide projections of how many people could be expected to do so. Economists aren’t offering numbers, either.

“It would be nice to know that these estimates show that the U.S. health-insurance system reduced the number of entrepreneurs by 1 million,” Fairlie said. “That’s very difficult to do. We’re looking at very specific parts of the population: people who have a spouse with health insurance and people who are turning 65.”

It’s unclear how the rest of the population will be affected, he said, “but it does suggest that something is going on here — that people really are restricted in starting a business.”

There is one laboratory of universal care similar to the system envisioned by the Affordable Care Act. It’s Massachusetts’ Health Connector — a marketplace that, like the upcoming exchanges, puts individuals and small businesses into large, stable pools.

The law was famously pushed by former governor Mitt Romney, who signed it in 2006 and has watched it evolve from a triumph to a millstone in his bid for the Republican presidential nomination. His signature achievement is now reviled by conservatives as the model for the “Obamacare” law they are trying to overturn.

Gov. Deval Patrick, a Democrat, lauds the program’s impact on his state economy.

“I met a young entrepreneur recently who moved his business up to Massachusetts from Florida because, with a young family, he wanted to be able to start his venture without worrying that his children would not have health insurance,” Patrick said this spring at the Center for American Progress. “Just as our businesses rely on good roads, a modern electricity grid and access to broadband to thrive, having a strong health-support system is another piece of our infrastructure puzzle, making us an attractive destination for new businesses.”

Business leaders agree. The Massachusetts health law “has not hurt our competitiveness at all,” said Jim Klocke of the Greater Boston Chamber of Commerce. “It’s been positive for our economy because it addressed some pressing social issues.”

Jean Hammond, who launched a couple of start-ups before becoming a Boston-based angel investor in 50 young companies such as Zipcar, described what she called a “weird mix of insurance coverage and taking-care-of-people issues” that entrepreneurs dealt with before the new law.

For instance, a start-up might want to offer insurance but finds that someone’s wife has a pre-existing medical condition that drives the cost of coverage out of reach. That has a ripple effect on hiring. Think, “We can hire Ralph because his wife has coverage through her job,” but “We can’t hire Joe because he’s nervous about losing insurance.”

At a start-up, “having the right, great employees is all the difference,” Hammond said. “You’re desperately trying to find a team that can solve problems faster and smarter than big companies can, get to market sooner. If people can’t come to work for you because you can’t meet their health-care needs, having that [problem] go away seems like a huge benefit.”

When Bill Kazman founded iTeam, which handles large-scale technology installations at businesses, there was no Health Connector. He and his wife arranged their lives so that they had continuous coverage for themselves and their three young children. He later started offering health benefits, just in time to keep an employee whose COBRA coverage was expiring.

Harthorne of MassChallenge said that the availability of insurance is not an “upfront motivator” for starting a business but that it has important benefits. One, as Kazman found, is that “it helps you to attract and retain talent.”

Harthorne knows this firsthand. He started the nonprofit group with three full-time employees and now has 10. The group doesn’t have the money to offer benefits, and one of its best employees used Health Connector last year. “She didn’t have another option on the table. She was very talented.” If not for Health Connector, he said, “She might have said, ‘Forget it.’ ”

Another benefit for business: Affordable insurance, and in some cases subsidies to help pay for it, saves money that could be crucial to success. “Start-ups are always strapped for cash up front,” Harthorne said. “Anytime you can reduce costs, give that start-up another month or two or three, you increase the success rate.”

Schmitt, the economist, once submitted to a “health audit” to see whether he could get insurance as a self-employed consultant in Washington. “I never would have gone out on my own without health insurance, leaving my family to fend for me if I got hit by a car or came down with cancer,” he said. Fortunately, he was 35 and healthy.

“It was determined that I did not have any need for health insurance,” Schmitt said. “And therefore, I was able to get it.”

While he was a PhD candidate at the London School of Economics, Schmitt said, he never heard anybody say anything about health insurance. “It’s a very different environment than we have here,” he said. It’s more like, “Yeah, we’re going to have a band. If we cover our expenses, we’re fine.”

Lawrence is a journalist who writes about policy and politics. She covered the 2009-10 health care battle for PoliticsDaily.com.

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