The Affordable Care Act, otherwise known as Obamacare, could encourage 1.2 million people to leave steady jobs and strike out on their own, according to a report released in May by the Center on Health Insurance Reforms at Georgetown University, the Robert Wood Johnson Foundation, and the Urban Institute. The reasoning the three think tanks gave for their bold prediction was simple: The availability of low-cost health plans for all will unshackle would-be entrepreneurs from a phenomenon known as “job lock,” where people feel pressured to stay with less-than-optimal employers solely so they can hold onto their health benefits.
Entrepreneur asked three economists to weigh in on the Affordable Care Act and its potential to increase the rate of startups and self-employment. While all of them agreed health reform would ease job lock, they each had a different take on opportunities and risks inherent in the predicted boom in entrepreneurship.
The primary impetus for previously job-locked professionals to be able to cut the cord with their employers is that people with pre-existing conditions can no longer be denied health insurance, says Michael Mandel, chief economic strategist at the Progressive Policy Institute in Washington, D.C. “The historical picture of the entrepreneur has been younger people who don’t care that much about health benefits, because they’re healthy, so it’s not the top thing on their minds.” Mandel says. “More recently there’s been a sense that people are open to taking more chances when they’re older. But how do they get the coverage they need? The elimination of the pre-existing condition clause makes it possible to go out there naked, get covered, and reduce the risk down to a level that’s do-able.”
In other words, not only can everyone get insurance, but if the law reaches its stated goals, they should be able to buy it at reasonable rates that can be balanced against the other costs of starting a new business, Mandel says.
Jon Gabel, senior fellow at the National Organization for Research at the University of Chicago, agrees with Mandel, but worries about what will happen if people who are now covered by plans that don’t comply with the ACA are allowed to keep their coverage. President Obama has proposed that insurers allow existing customers to keep those plans for another year, while Congress is debating a bill that would keep those policies open indefinitely—and not just to existing policy holders, but to anyone who wants to purchase non-compliant coverage.
Gabel believes if non-compliant plans are allowed to co-exist with compliant plans, the so-called risk pool will become unbalanced. The ACA requires that insurers set premiums in the individual and small-group market based on a single risk pool, meaning they can no longer charge higher premiums to higher-risk patients (i.e. older people or those with pre-existing conditions).
But if too many young people flock to those older, non-compliant plans, the single risk pool on which ACA plans are setting their rates will be skewed upwards, because of the expectation from insurers that they will need to charge higher rates to cover people who are less healthy and therefore likely to ring up more medical costs. “The efforts to extend non-compliant plans and grandfather them forever will destroy the risk pools,” Gabel says. “We have to keep those risk pools comprehensive. If they get worse, that makes [premiums] more expensive,” which would in turn hamper entrepreneurship, he says.
Many economists agree that the Obamacare effect on entrepreneurship will be most pronounced among older workers—those in their 50s who need a bridge between company-provided health insurance and Medicare. “Those folks actually have twice as much health insurance usage as someone who’s younger,” says John C. Brown, research professor of Clark University’s Mosakowski Institute For Public Enterprise in Worcester, MA. “They’re pre-Medicare and may have the highest incentives of anyone to be released from the job-lock problem.” Many of those people will be eligible for government subsidies, which will bring the costs of buying insurance on the public health exchanges down even more, he adds.
Brown says a good way to preview the ACA’s impact on entrepreneurship is to study what’s happened in countries with socialized health systems. The rate of self-employment as a percentage of total employment in the United Kingdom over the last 15 years, for example, is about 13 percent—almost twice that of the United States—according to the Paris-based Organisation for Economic Co-operation and Development. “The bigger the social net, the more likely you are to be in a position to take risks,” Brown says.
The true effect of health reform on entrepreneurship remains to be seen, especially given a problem-plagued website that’s making it difficult for people to enroll. Still, there’s little doubt among economists that the guarantee of health coverage will give people weary of the 9-5 routine many more options to consider. “Think about patterns of work we’ve all grown up with, where people worked for an employer until they were 65,” Mandel says. “This gives workers an easier way to head toward a second or third stage of their career.”