Employer-sponsored health insurance leads to “job lock” among workers. New evidence shows that “entrepreneur lock” likely limits small business development when Americans fear losing their health insurance.
Employer-sponsored health insurance (ESHI) is the most common type of health coverage for a majority of Americans. Fifty-nine percent of adults under 65 rely on ESHI; just about one half of all Americans (including the elderly and children) do the same. This predominant method of obtaining health insurance is a remnant of World War II wage policies. The cumulative effects of this decades-old decision to tie health insurance with employment leads to an adverse consequence known as “job lock” among policy wonks and health economists.
Job lock refers to the inclination of workers to remain in a specific job, rather than switching to another, because of concerns about losing health insurance coverage. A recent study examined data from the Current Population Survey (conducted by the US Census Bureau and the Bureau of Labor Statistics) and linked them across multiple years in order to detect which people switch from being someone else’s employee to starting their own business. In effect, the researchers were looking for “entrepreneur lock.”
Approximately 20 percent of self-employed business owners are uninsured; by comparison, wage-workers tend to have rates of uninsurance of only 10 percent. Descriptive statistics further suggest that movement from being a wage-worker to becoming a self-employed business owner is less likely to occur when an individual has ESHI. Among men, 4 percent of wage-workers transition to starting a business each year. However, for those with ESHI the start up rate is only 2.9 percent compared to 6.6 percent who have health insurance coverage via their spouse (and 6.5 percent of those who are already uninsured).
A similar pattern emerges for women. The overall rate of transition to business ownership is 2.3 percent per year. This movement appears to be driven by those with coverage through a spouse (3.2 percent) or already uninsured (3.7 percent) while workers with ESHI are less likely to create a business (1.5 percent).
The authors then use several statistical models to estimate the effects of ESHI on business ownership for adults in various situations. One group compares those with health coverage provided by either their own or their spouse’s employer. Adults with health concerns in the family but without insurance coverage via a spouse are significantly less likely to start a business compared to adults with spousal coverage.
Seniors newly becoming eligible for Medicare represent another special group where the bonds of “job lock” are broken. There is a statistically significant bump in business ownership rates among adults just under 65 (24.6 percent) to just over 65 (28 percent). Of note, additional bumps occur at ages 59 and 61 but do not have nearly the same magnitude of the age 65 increase.
Any health economist will tell you about “job lock”: the limitation in movement of workers across jobs because of reluctance to loose employer-sponsored health insurance (ESHI). The current study identifies evidence for “entrepreneur lock” which would be defined as limited movement from a wage-earning job (especially one with ESHI) to self-employment as a small business owner.
Americans often proclaim an admiration for entrepreneurship; perhaps reconsideration should be made to long-standing policies that favor ESHI over that of individually purchased insurance (often the only type available to small business owners). Data from this study suggest that divorcing health insurance from the type of employment (wage-earner versus business owner) might improve the ability of Americans to pursue their own entrepreneurial ventures.
Other studies have shown that the differential tax treatment between employer-based and self-purchased health insurance might contribute to entrepreneur lock. This $157 billion of federal subsidies adds to the problem.
Although equalizing the tax treatment of health insurance between individual- and employer-purchased (preferably via a limited tax deductible amount) should be pursued immediately, additional efforts are needed to make insurance portable for patients.
Cedric Dark, MD, MPH