Starting a business has always been a risky financial undertaking. With the huge rise in health insurance costs over the last decade, I’m increasingly worried we have created an enormous new obstacle that discourages and slows down the growth trajectory of new businesses.
This post is not about rehashing the debates over the federal healthcare reform known as the Patient Protection and Affordable Care Act (PPACA), though there is much for entrepreneurs to learn about this new law. Instead, I hope to offer a practical view of the issues health insurance costs pose to entrepreneurs.
I am CEO of my own company, Biotech Stock Research, LLC, founded in 1999. So this is an issue I face personally as I try to build this company along with my business partner Alan Leong. We’ve also spent more than 10 years together teaching entrepreneurship to students at the University of Washington Bothell, and encouraging them to think hard about all the various risks and benefits that go with creating their own companies. We helped these students launch more than 90 companies in the decade we ran the program, making it one of the most successful undergraduate programs in the nation at company formation.
The program we created evolved with our students’ needs. A decade ago, everyone was looking for the prototypical $100 million-in-5-years VC-backed idea. More recently, we saw businesses focused on launching via bootstraps and/or with small amounts of seed funding from friends and family members. These more recent ideas were the kinds of small businesses that form the backbone of economic activity in America.
What really worries me is how many of today’s entrepreneurs might never get a chance to pursue their dreams at a startup company, because they just can’t afford health insurance.
I’m 44 and in very good health. I’ve never smoked a day in my life and have no particular familial or genetic health risks. My insurer, Regence Blue Cross, nevertheless charges me some $6,000 a year for health insurance. This is three times what they charged me a decade ago. My deductible for this expensive plan is five times higher than it was a decade ago, plus it comes with a substantial copay that wasn’t present previously.
For a bootstrapped company, this insurance cost is a huge barrier to starting a business. As I mentioned above, this article is not about the new federal healthcare reform law, and the reason for this cost increase has nothing to do with that historic piece of legislation.
Given the state of health insurance, let’s do the math on what this means to startups. A three-person startup will need to find cash from savings, credit cards, friends, or rapid revenues of some $15-18,000/year just for health insurance. That’s not a ton of money in a venture-backed business model, but my experience is the VC-backed business is not what most entrepreneurs today are shooting for. They’re looking for a bootstrapped model they can fund themselves.
I am worried healthcare costs are proving to be a big barrier to anyone considering launching their own business. In addition to salaries, legal costs, and product development costs, that $18,000 is a big bite out of a startup budget.
Entrepreneurs, as a species, are inherently adaptable. I’ve seen some very creative ways entrepreneurs have addressed this issue.
For married or partnered entrepreneurs, having their significant other help in the business is a traditional way of keeping costs down. Traditionally, that meant the entrepreneur and his/her spouse both joined the business as low-cost laborers to keep costs down. Increasingly, it means the spouse maneuvers him/herself into a job with health benefits that can cover the family. I’ve seen spouses make health insurance for their family a negotiating point at salary negotiation time in order to help get their partner’s business off the ground.
One largely unintended benefit of new federal healthcare rules is it helps young entrepreneurs under 26. Under the law, insurers are required to cover “kids” living at home under age 26 on their parents’ plans. For younger entrepreneurs, this allows access to health insurance for little to no additional cost to the business.
For everyone else, the economic reality of insurance costs means a much longer startup and ramping phase. The entrepreneur works on the business part time and on weekends, keeping his/her existing job at a big, steady company primarily for its health benefits. This is the most common way of addressing the issue I observed over the last few years of our UW Bothell program. While being an entrepreneur is all about taking calculated risks, many entrepreneurs— especially those with families—were not going to risk losing affordable health insurance. They often chose to keep the full-time job with benefits, even if they knew that meant it would slow down their startup’s growth curve.
There are many barriers to becoming an entrepreneur. There are even more barriers between a business launch and a successful business. I find it distressing the high cost of healthcare is increasingly a major component of both barriers.
The last 20 years of economic activity have proven to me beyond a shadow of a doubt that America works best the more startups we have. The 1990’s experiences with a startup economy brought us full employment and budget surpluses. The 2000’s focus on large businesses brought us to the brink of a second Great Depression and huge budget deficits. I’m not sure two decades could be any more instructive as to the importance of small businesses to America.
We have to figure out a way to make it easier for entrepreneurs. Smart states will create very large risk pools and “encourage” everyone to make use of them since larger risk pools can mean lower insurance costs. States with compatible tax structures can offer insurance deduction help for startups or small businesses along the lines of those in the new federal healthcare law. We need to extend the precious few concepts that made it into the federal law that help bend the cost curve, some of which can be done on the state level.
It doesn’t need to be a government-based solution. Trade groups often offer insurance plans, though my personal experience with them is they tend to be more expensive than individual plans through Regence. What might be more useful from trade groups is a much broader variety of plans combined with financial and tax advice so smaller businesses and particularly startups can lessen their healthcare cost burden.
Maybe the most potent solution comes from the natural willingness of entrepreneurs to share their good ideas with other entrepreneurs. If you’ve found a clever way of reducing healthcare costs for your business/startup, consider sharing it in the comment section. With the collective wisdom of Xconomy readers, we might be able to save each other a fair bit of cash.
We’ve got to do something or healthcare costs will make the entrepreneur who jumps with both feet into a new startup an endangered species.
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