Unlock Entrepreneurship through Health Care Reform

Jonathan Ortmans, President, Public Forum Institute

All Presidents who take on tackling reforming American health care deserve a medal for trying. I have been actively engaged in health care economics for more than 15 years and after facilitating hundreds of town halls aimed at finding common ground, I can attest that whoever leads the charge makes as many enemies as friends.  In 1994, I convened a summit presided over by among others then Senate Majority Leader Bob Dole and First Lady Hillary Clinton in Kansas City. “Summit of Harmony” was the front page headline of the Kansas City Star.  I flew back to Washington with a group of Senators hopeful that we had actually changed the tone of Washington politics on health care at last.  Bob Dole and Hillary Clinton were going to work it out.

Jump forward to the present. The legislative branch is well underway in getting a bill together and President Obama has already gathered together publicly and privately key leaders with diverse views on how to achieve the three-fold goal of lowering health care costs, expanding coverage and improving quality. The President is also offering a 2010 Budget that sets aside a deficit-neutral reserve fund of $635 billion over 10 years to help finance reform of our health care system. With a likely veto proof Democratic Congress, the powerful potential opposition is more likely to come from those such as the six leaders of the health care industry who attended last Monday’s gathering at the White House. The morning headline though might well have been the same - with their pledging to decrease the annual health care spending growth rate by 1.5 percentage points.

So what is the wild card this time if the health care industry sees fit to support this President and Congress and keep “Harry and Louise” ads off the air?  It is of course the recession. Economists anxious in 1992 about exploding entitlement spending in an aging America can only be in a state of pure panic today with headlines of negative growth rates and high unemployment.  Health care economists will remind us that health care is a tax and budget issue and a better health care “system” is less about the debate between using tax credits or taxes to finance care but more whether America can afford what it citizens clearly demand.
Enter the entrepreneurs. If you subscribe to one of the themes of this column that entrepreneurship equals recovery and have absorbed the significance of the now often repeated facts around new firm formation, you will concur that our first rule should be do not harm to the revenue and job generators.  Policymakers should carefully evaluate the effects of health care reform, particular the health insurance system, on entrepreneurship and the economic growth and revenues it brings to pay for health care.

Entrepreneurs are currently constrained by the pressure of having to provide health insurance for themselves and to offer it to the employees they seek to attract. Given their smaller workforces, entrepreneurial firms have smaller ‘risk pools,’ which means that insurers charge them higher premiums. The NFIB (National Federation of Independent Business) estimates that the self-employed for example, pay an additional 15.3 percent tax on their premiums. The self-employed may deduct their premiums from income tax but not payroll taxes. The SBA in turn found that health insurance deductibility enhances entrepreneurial survival. It estimated that if the self-employed could deduct health insurance like other businesses, the average likelihood that single-filers will exit the entrepreneurial sector falls by 10.82 percent.

It is important to remember that the current system of employer-sponsored health insurance is an accident of history. Employers began offering health insurance during World War II as a way of circumventing wage controls in place at the time. Employees were not required to recognize the health care benefit as part of their taxable income. More and more firms began offering health care coverage, creating the current employer-based system of health insurance.

Today’s uncertainties surrounding health insurance availability in the individual market may even lock many entrepreneurs in jobs that offer health insurance at a low premium. This job lock effect undermines entrepreneurial innovation. In addition, tying insurance to employment contributes to higher health care costs by reducing the incentives for individuals to really shop for medical care.

In seeking reform, policymakers should find the right institutional answer to these effects on the labor market. At the broad level, the solution is straightforward: decouple health insurance from employment. This could be achieved by, for example, phasing out the tax policy that undergirds the current employer-based health insurance system, which should lead to a rise in real wages that would be used to purchase insurance individually or through non-employer groups. If you are not keen on placing so much responsibility on the individual, there are also public sector options with the government playing a role similar to that it does with “Medicare”.  Either way, America must find a way to remove health care as a competitive disadvantage for American employers in the global economy.  As a nation, we must dissipate the fear of leaving a company to start a new enterprise or work for a start-up.

The current incentives leading to job lock affect not just entrepreneurs, but a large sector of society. First, entrepreneurs are the drivers of medical innovations which can improve quality and even cut costs. Second, because small firms provide the majority of jobs in the U.S., their disadvantage in health premiums affects many Americans. The SBA estimates that while nearly all of the employers with 200 or more employees offered health benefits to their workers, only 62 percent of businesses with fewer than 200 employees offered such benefits in 2008. People who cannot get health insurance at work must pay their premiums out of after-tax income. In other words, it is also a matter of coverage.

Consensus is rarely easy to achieve on an issue that touches our personal lives and our economy so deeply, but I think that we can all agree that addressing health care barriers to entrepreneurship should be part of a pro-growth reform.

Jonathan Ortmans is a senior fellow at the Kauffman Foundation where he focuses on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues.

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