How the Health Care Mess Affects Entrepreneurship
by Scott A. Shanes, Courtesy of the New York Times

This article corroborates some of my beliefs that health care is not just specifically only a human rights issue: it's a socioeconomic justice issue. I have never found it fair that larger companies with stronger bargaining power get lower premiums than smaller companies and individuals. Furthermore, who pays for the companies' premiums to be lower? Certainly not the health insurance. That cost is reflected in individual and small business plans. That's just my two cents. -LBL

In response to my earlier post on declining trends in rates of entrepreneurship in the United States, a lot of people commented that the cost of health insurance was a big part of the problem. So this week I am taking a look at the effects of health care on small business and entrepreneurship.

Clearly, health care costs have reached levels that are adversely impacting entrepreneurial activity. One result of the spiraling expenses is the inability of new companies to offer health insurance to their employees. The Kauffman Firm Survey, which tracks a sample of new businesses drawn from the 2004 cohort of U.S. start-ups, reports that only 29.5 percent of new employer firms and only 12 percent of all start-ups provide health insurance to their full-time employees.

A second effect has been to lead many older small firms to reduce health care coverage. According to the Kaiser Family Foundation, which conducts an annual survey of health care costs, the majority of businesses with three to nine employees do not offer employee health insurance; only 49 percent of these businesses did so in 2008. Moreover, the foundation data indicates that the provision of health care is much lower among small businesses than large ones. Only 62 percent of companies with three to 199 employees offer health insurance, as compared to 99 percent of businesses with more than 200 employees. According to the U.S. Small Business Administration’s Small Business Economy 2009, 25 percent of the 15.7 million workers in small businesses do not offer health insurance.

Self-employed people are much less likely than other people to have health insurance. The 2009 Small Business Economy reports that only 49.3 percent of self-employed workers have employment-based health coverage, as compared to 70.5 percent of wage and salary workers. Moreover, the S.B.A. publication also shows that approximately 3.7 million self-employed people aged 18 to 64, or 26 percent of the total, are uninsured.

Small businesses also pay more for health insurance than large companies. According to the Commonwealth Fund, small businesses now pay 18 percent more than large businesses pay to obtain comparable insurance.

A third effect of the tremendous rise in health insurance costs over the last decade has been to impose a huge financial burden on new companies. The cost for the average new company to provide its employees with family health insurance at the average cost for firms of its size (as reported by the Kaiser Family Foundation) is now $68,611 a year, more than double what it was 10 years ago. Granted, some of those costs aren’t paid by the employers, and some employees have individual coverage, making the actual numbers paid by employers lower, but it’s still a huge figure in comparison to new-firm revenue. According to the Kauffman Firm Survey, the average three-year old surviving firm generates only $152,000 in revenue annually.

Finally, because leaving a job to start a business causes one to give up employer health insurance, the employer-based health insurance system in this country is keeping some people from becoming entrepreneurs. A recent working paper by Rob Fairlie of University of California Santa Cruz estimates that workers with employer-provided health insurance have 2.5 to 3.9 percent lower odds of becoming self-employed than those without health insurance, suggesting that health insurance affects the start-up decision.

To all the readers who commented on my earlier posts and got me to look at health care costs and entrepreneurship, you’ve got me worried. The health care mess is clearly weighing down entrepreneurship in this country.

Scott A. Shane is a professor of entrepreneurial studies at Case Western.