Health Insurance Coverage and Enterpreneurship
Wellington, Alison J., Contemporary Economic Policy
ALISON J. WELLINGTON (*)
This article estimates the importance of health insurance coverage on the probability of self-employment. Using data from the 1993 Current Population Survey (CPS), the author focuses on the impact of having health insurance through one spouse on the likelihood of self-employment. The best estimates suggest that a guaranteed alternative source of health insurance would increase the probability of self-employment between 2.3 and 4.4 percentage points for husbands and 1.2 and 4.6 percentage points for wives. The author's more conservative estimates suggest that universal coverage could increase the percentage of self-employed in the workforce by 2 to 3.5 percentage points. (JEL J2, J3, I1)
As is well known, health care costs have been steadily increasing in the United States. In 1960, expenditures on health care were 5.1% of total GDP. By 1980 this figure had grown to 8.9%, and by 1994 health care expenditures totaled 13.7% of GDP (U.S. Bureau of the census, 1996). The rise in health care costs that has fueled this steady increase in total health care expenditures has increased the necessity of having health insurance and made health insurance an increasingly important benefit of employment. Employer-provided health care coverage tends to be more affordable for individuals, not only because the employer pays for some (or all) of the premium, but also because employers can receive group rates for their employees. In 1995 more than 90% of people under the age of 65 with private insurance were insured through their employers (U.S. General Accounting Office, 1997). But when an employee decides to start his or her own business, she or he forfeits the availability of (relatively) inexpensive coverage . According to one study, 95% of self-employed people work in firms with fewer than ten people (Monheit and Harvey, 1993). Therefore, even if a self-employed person decides to purchase health insurance through her or his company, it is unlikely the person will be able to receive the group benefits obtainable working for someone else.
With the passage of the Consolidated Omnibus Budget Reconciliation Act (COBRA) in 1985, employees who left their employers for any reason besides gross misconduct could continue receiving health insurance through the employer for up to 18 months, although they would be responsible for paying the entire premium. This act might increase the probability that a worker would leave one employer to search for a job with another, and it may encourage people to enter self-employment on a trial basis. However, after 18 months, the entrepreneur must still consider this extra cost of obtaining health insurance.
Clearly, the lack of universal health coverage and the high cost of obtaining private health insurance may be expected to have a dampening effect on entrepreneurship. In a 1993 article, Laura D'Andrea Tyson is quoted: "'The difficulty of self-employed workers and small business today in purchasing health insurance creates large disincentives for individuals to leave covered jobs to start up new businesses. Reform may thus stimulate new business formation, particularly for small businesses"' (U.S. Bureau of National Affairs, 1993).
A comparison of health insurance coverage characteristics between self-employed and wage and salary earners (or wage earners) indicates that there are striking differences. In the present sample, 35.8% of the self-employed have no employer-related health insurance coverage, compared to only 10.9% of the wage earners. Furthermore, for 46.2% of the self-employed their only source of health insurance is their spouse's plan, whereas only 24.7% of wage earners solely rely on spouse's coverage. Yet in a 1996 study by Holtz-Eakin et al., the only study the author is aware of that specifically examines the effect of health insurance coverage on entrepreneurship, the authors find no statistically significant impact of the availability of health coverage portability on the transition to entrepreneurship. …