Want to Create More Startups? Do More to Corral Health Insurance Costs

2/17/11

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.

David D. Miller co-founded Biotech Stock Research LLC in 1999 to provide an independent research source for investors in publicly-traded biotech companies. Follow @

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  • http://www.MountainLogic.com Scott Elliott

    The model of having businesses providing health care is not sustainable. It encourages a race to the bottom especially with globalization. We should share the burden by paying for part of the cost, say the hospitalization part, through a national carbon tax. As a nation, we are going to spend a certain amount every year on health. Yes, we can and should continue to work on making reforms to the health system to reduce those costs, but it is always going to be a big number. By dumping these costs on business we are creating a huge friction to new employment that business are not well placed to optimize. A consumption tax moves the health care burden away from job creation. A carbon tax is an attractive, easily implementable, short term solution as it can be a very large revenue source that achieves the positive social goals of reducing the imports of oil from unstable regions, reducing CO2 emissions and supporting the growth of clean renewables and energy efficiency. We must move health care cost from being funded by a production burden (a defacto production tax) to a consumption tax if we want to spur job growth.

  • Keith W

    My thoughts exactly, David. I’ve worked in startups early in my career, and had purchased insurance myself at one point. But now with two kids and my wife and I nearing 50 there’s no way in the world I would take on that cost. So as my experience grows and I become more valuable to startups, my willingness to work with them has gone to zero because of health insurance. I’d love a Canadian type system where health providers are indepedent of the governament, but taxes support the single payer. The difference in quality is a myth – of course you don’t have to wait if you need bypass surgery today. If we want to encourage more startup risk taking, take the risk out of health insurance. Thanks for writing this.

  • Pingback: Want to Create More Startups? Do More to Corral Health Insurance … | health insurance

  • http://www.BiotechStockResearch.com David Miller

    @Scott – You hit on an important point here. Products from US manufacturers who offer healthcare have a healthcare COGS that is a multiple of similar costs for a ex-US company making the same product.

    I’m not sure carbon taxes are the way to fund a public option. I’d rather see carbon taxes go to development of low-carbon energy sources. The problem is so acute, however, I’m open to any ideas. We’ve absolutely got to have a conversation about this.

    @Keith demonstrates precisely why. I write about how heathcare costs/access are a barrier to startups. Keith brings up the important corollary point is that it is tough for startups to afford experienced help due to insurance costs. Those sub-26 year olds may be able to skate by on their parents’ insurance, but if they need to bring in someone older with a specific skill set, they’re in the soup.

    Thanks for the comments,
    David

  • https://sites.google.com/site/7thpillarservices/ Alexander Zayachkov

    With all the financial analysis the author performed I was surprised not to see ROI analyses for Health Coverage. Recent studies indicate that those who have the financial ability to provide for their own family’s Health Coverage generally choose not to. Why? Because they ran the numbers.

    Real Life Analysis- Why I negotiate away Health Care
    I’m a 51 year old Independent (Boot-Strap Entrepreneur) Consultant with an 18 year old daughter. For most of my daughter’s life when Health Coverage was available we had to pay Family Rates even though there are only two of us to cover.

    The last time I had hard figures to negotiate with, Blue Cross Blue Shield coverage would have cost $1200/month (total contribution from employer plus my contribution) with deductibles and co-pays along the lines described in the article. That works out to $14,400/year, over 18 years (my daughter’s life thus far) total contribution is $259,200.00. Our total health care costs during this same 18 year period was about $14,000, including treatment for injuries I sustained in an auto accident. Plus I had to sue one of my insurers to force them to pay for treatments covered by my policy!

    A quarter million dollars into a Black Hole, cash that could have been better managed or put to Productive Use by my businesses.

    But what about catastrophic situations? The reality is that if you or a family member gets hit with a catastrophic illness or injuries, even with Health Care coverage you will likely bankrupt yourself to cover treatment expenses. Medical Care remains one of the top causes of Personal Bankruptcy in the U.S.

    Health Care coverage is a negative lottery – if you win, it means you lose. A legally sanctioned Ponzi Scheme? You bet. Madoff would still be living large had he chosen to go into Health Care instead of phantom investments, and his actual returns would likely have been as good as his fictional returns.

    By the way, I have worked within the Health Care Insurance industry.

  • http://www.BiotechStockResearch.com David Miller

    @Alexander – You are not alone in that kind of CBA. I’d certainly like to have back all the renter’s, homeowners, auto, and life insurance premiums I’ve paid because I have not had a claim on any of those in decades.

    Personally, I paid about $3,500 in health insurance in 2010 and $2,400 out of pocket for healthcare as all my healthcare in 2010 was under my deductible. I also would rather not have had to pay the insurance, except if my knee pain had been a surgical case then it would have been a good deal. My insurer also negotiates significant care discounts (about $3,000 total) on my behalf.

    I’ll note that the choice you suggest making is “Nothing catastrophic” vs. “Bankruptcy”. This choice has societal implications because bankruptcy due to lack of sufficient insurance coverage isn’t as if the care goes uncompensated. It’s compensated by an add to my insurance premiums. This is the underlying idea behind universal coverage.

    HC-related BKs are an interesting conundrum. How many of these BKs are in uninsured or underinsured patients? The more un-/under-insureds that declare BK, the more serious the need there is for universal coverage.

    One can certainly argue it is your right to take the CBA bet you suggest, but as a society we’ve decided in other areas this isn’t true. Helmets, seat belts, auto insurance, driver licensing, professional licensing, etc are all areas where society has placed limits on such rights. The issue of PPACA mandate constitutionality is a federalism issue (a legislative design error to be more precise), but not otherwise a constitutionality problem.

    Thanks for the nicely-described post and good points.

    David

  • https://sites.google.com/site/7thpillarservices/ Alexander Zayachkov

    Thank you for the thoughtful reply David. Our differing opinions can surely be linked to our essential premises.

    While I don’t have hard statistics at hand I would bet that the majority of HC-related BKs are to those who think that they have “full” medical coverage. Those without HC coverage, or minimal coverage generally do not seek medical care unless absolutely necessary and they accept that the costs of some care is beyond their means. While those who think they have golden plans avail themselves to medical care and treatment with every sniffle, ache or pain that arises.

    The underlying problem is the Third Party Payment system we have come to think of as the ideal method for purchasing services, for this creates a huge disconnect between costs and value received. Anecdotally, in the workplace and in my personal relations I have known people to run the the ER, or Urgent Care Clinic rather than their physician for minor health issues – cold, flu, sore throat, etc., and while they explore all the Latest Treatments they fail to realize that our physiology is such that 99% of illness and injury will will be “cured” with or without medical intervention. If medical intervention is the proper course, these people are the first to go for the most radical and costly options, with the encouragement of HC providers, simply because someone else is doing the financial heavy lifting. For example, splinting, casting or otherwise immobilizing a fractured bone is a relatively inexpensive means of aiding the healing process. But if you have insurance we are going to call in an Orthopedic Surgeon (note: I used to sell replacement hips, knees and medical/surgical devices to Physicians and Institutions) and you will receive a surgical implant – a nail for broken femur, plates and screws, or external fixation (metal tinker-toys) rather than the less costly options.

    So those with great HC coverage are probably more likely to create societal problems with an HC related BK, because they are also more likely to have more secured and unsecured debt compared to those with limited or no HC coverage.

    Further, the best interests of the patient are seldom the real reason for any course of treatment. The following link regarding the medical establishment may be eye-opening for some, but having worked within the HC fields I find it refreshingly forth-right.

    http://www.newsweek.com/2011/01/23/why-almost-everything-you-hear-about-medicine-is-wrong.html

  • http://contractors-liability-insurance.org/ J. Daniel A.K.A. “The Contractors Insurance Geek”

    I’m all for the Canadian system. As a small business owner and married father of two, I pay $14,000 a year for health insurance coverage for my family, and that includes a $2500 per person deductible. Get the profit out of the healthcare system (providers and insurers) and we can fix this mess.