How Employer-Based Health Insurance Curbs Entrepreneurship

One of the consequences of having a predominantly employer-based health insurance system is that it can discourage workers from going into business for themselves, according to a recent RAND study published in the Journal of Health Economics.

With almost three-quarters of all full-time U.S. workers receiving health insurance from their employers, there have been concerns about a phenomenon called “entrepreneurship lock” — an unwillingness by those who have such employer coverage to leave their jobs to start new businesses because of the high cost of health insurance premiums or the possibility of disrupting or losing their coverage.

The study, by the Kauffman–RAND Institute for Entrepreneurship Public Policy, takes a novel approach to examining the issue of entrepreneurship lock. Using data from the Current Population Survey, the study examines whether people with employer-based health insurance are more likely to become self-employed (a) if they have an alternate source of health insurance through a spouse or (b) if they have reached the age of 65 and become eligible for Medicare.

The study found evidence of entrepreneurship lock in both cases. In the first case, “Men and women with poor family health and no access to a spouse’s health insurance were significantly less likely to give up an employer plan and start a new business than were those with access to insurance through their spouses,” said Robert Fairlie, a RAND economist. “Those with access to a spouse’s health insurance plan are much more likely to become self-employed.”

Among the entire U.S. adult population, the annual base business creation rate is 3 percent. Among U.S. men, entrepreneurship lock reduces business creation by 1 percentage point. Among U.S. women, the business entry rate is lower overall, but similar patterns emerge with respect to the effect of health insurance coverage.

Self-employment rates also rise when Medicare becomes available to U.S. workers at age 65, as shown in the figure for men. There is a large and statistically significant increase in business ownership rates when U.S. workers turn 65 and qualify for universal health care coverage under Medicare. The study determined that self-employment rates did not jump up at any other age (between 55 and 75) and that the increase in business ownership in the month when people turn 65 was not the result of other factors, such as retirement, Social Security, or pension eligibility.

When U.S. Men Qualify for Universal Health Insurance Through Medicare at Age 65, Their Business Ownership Rates Increase

SOURCE: “Is Employer-Based Health Insurance a Barrier to Entrepreneurship?” Journal of Health Economics, Vol. 30, No. 1, January 2011, pp. 146–162, Robert W. Fairlie, Kanika Kapur, Susan Gates.

NOTE: “Just under age 65” is two months before the birth month. “At age 65” is the birth month. “Just over age 65” is two months after the birth month. The data are derived from the Current Population Survey from 1996 to 2006.

“The analyses provide some evidence entrepreneurship lock exists, which raises concerns that bundling health insurance and employment may discourage business creation,” said Fairlie. “The availability of affordable health insurance for the self-employed has an important impact on whether individuals are likely to become entrepreneurs.”