How the U.S. Health Insurance Boondoggle Stifles Innovation

Tech startup founders who have it all—a great idea, a pile of cash, and enthusiasm to burn—are still missing one thing. The ability to provide basic health insurance to themselves and their dependents. It’s a powerful disincentive to creating jobs in an economy that desperately needs them, and forces innovators who would otherwise strike out on their own to continue sharecropping for someone else.

I know this from firsthand experience. When I’m not talking at you here on Tech Review, I’m cycling through startups—I’m on my third or fourth—and swapping strategies for staying solvent and sane with other sole proprietors. For a freelancer or any other kind of one-person shop, it’s difficult or even impossible to find health insurance at rates that resemble even the full-burden plans you can get after you leave an employer and have the option to pay both your share and theirs for 18 months under the federal COBRA plan. Depending on your state and your pre-existing conditions (these include things that aren’t actually diseases, such as pregnancy) you might not be able to get health insurance at all.

The United States spends far more on health care than other developed nations, yet has significantly worse outcomes, says a just-released report from the OECD. That’s the dumbfounding irony of the innovators dilemma, health care edition. Our system is so broken that even having enough money set aside to launch a new venture is no guarantee you’ll be among those who can afford private health insurance.

And it’s not as if this is a new phenomenon—academics have long been loudly declaring that our health system is stunningly wasteful and inordinately expensive, yet on average no better in its outcomes than those of our neighbors, such as Canada.

In some states, there is a solution. In New York, for example, it takes as few as two employees in a startup to form a group, which can then get discount rates from existing health insurers. Those insurers are not allowed to discriminate based on pre-existing conditions.

This doesn’t help the lone guns out there, most of whom, my own informal survey reveals, are relying on spouses for health insurance. I’m one of them.

Long-term, the addition of health insurance to the incentives to marry isn’t a sustainable solution, and for same sex partners in certain states, it’s no solution at all. The exchange provision of the healthcare bill is supposed to help with this, but it’s not clear if it will survive future administrations, acts of Congress, or the Supreme Court.

As the nature of work changes – with remote work, the Internet, and increasingly fluid labor markets encouraging us all to forsake the 9 to 5 for a more entrepreneurial model of compensation – we’re going to have to fix the way we address the health needs of the ever-growing portion of the labor force that is self-employed. The price is our competitiveness.

Photo: UggBoy♥UggGirl

Further reading on this topic, via Keith Grant:

• How the Health Care Mess Affects Entrepreneurship - NYTimes Economics blog

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.

• Unlock Entrepreneurship Through Health Care Reform - Kauffman Foundation

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.