Decidedly Unhealthy for Entrepreneurship

(A previous version of this article appeared in The Christian Science Monitor.)

Small business creation is probably the single best thing for the economy. Most jobs come from small businesses. And nearly every big business started out that way, when someone decided to take the plunge and become self-employed. But now, a lot less business creation goes on than could be going on. The culprit? The government subsidy (via the tax code) for employer-provided health insurance.

And President Obama has no plans to change that. In fact, if he gets his way on health care redesign, he’d exacerbate it.

Lots of people decide not to become self-employed because it would mean losing their employer-provided health insurance. Although I know of no studies that estimate the extent to which this happens, anecdotal evidence indicates that it is very common.

And it is totally unacceptable. Traditional barriers to starting a business include taxes and regulations. But health insurance? People should not have to pay more for this when starting a business, just as they do not have to pay more for their car insurance, groceries, or any number of other personal expenses when starting a business.

The problem stems from the bizarre tradition of getting health insurance through one’s employer, thanks (or rather, no thanks) to a quirk in the tax code. Just as people do not get their car insurance through their employer, they should not have to get their health insurance through their employer. Sure, they can try to buy it on their own, but that would mean paying anywhere from a couple hundred to a couple thousand dollars a month. The institution of employer-provided health insurance has practically destroyed the market for individual health insurance.

Because employers are the main purchasers of health insurance, the marketplace is a lot less competitive than would otherwise be the case. By contrast, if everyone had to buy health insurance on their own, health care providers and insurance companies would be forced to compete much more aggressively based on price and quality. A diversity of plans would sprout up tailored to a diversity of individual needs. Many people, for example, would opt for high deductibles and pay out-of-pocket for smaller expenses.

Right now, health care providers are not so incentivized to charge lower prices because they know that patients’ insurance companies will pick up the tab, even for check-ups and other minor procedures. (This is like your car insurance paying for oil changes.) If, on the other hand, there were a large population of out-of-pocket-paying people shopping around based on price and quality, the price of health care would plummet.

The market for veterinary care provides a valuable insight. Columnist James Freeman, writing in a few years ago, points out that the same surgeries performed on humans can be performed on our canine friends for about one-tenth the price. This is mainly because veterinary care providers are forced to aggressively compete for cost-conscious customers. Were the same to happen with human health care, prices probably would not be as low as those of veterinary care, but they still would fall considerably.

So if everyone obtained their health insurance directly rather than through employers, not only would health care be a lot less expensive, but it would play no role in a would-be entrepreneur’s decision to quit a regular job in order to start a business.

The peculiar institution of employer-provided health insurance stems from – what else? – government intervention in the marketplace. During World War II, when government-imposed wage and price controls prevented salaries from being raised, employers started to offer health insurance to attract workers. Politicians and IRS officials then instituted a generous tax break for it. It is essentially a disguised government subsidy favoring employers and employees, at the expense of the self-employed, the non-employed, and those who work for companies that do not offer health insurance. (Note: A subsidy is when a certain group of people gets a government handout paid for by higher taxes on everyone else. A tax break is another way to do the same thing. Taxes on everyone else have to be higher in order to make up for the government’s lost revenue.)

To help correct the wildly distorted health insurance market and achieve a level playing field for the employed, the self-employed, and the non-employed alike, the tax break for employer-provided health insurance should be abolished. Or as a second-best remedy, there should be an equivalent tax break for individuals when buying health insurance.

Incredibly, President Obama and the Left would further burden businesses by requiring them to pay a new payroll tax if they don’t already provide health insurance. They want to start a huge new government program to try to correct the ill effects of another government program, and would only make things a lot worse.

You’d think that if they’re going to socialize healthcare, they at least could decouple it from employment.

A far better solution is to eliminate that original government program – i.e., the tax subsidy. Then, businesses would get out of the business of providing health insurance to their employees (and spend the savings on higher salaries), people would shop around for it on their own, health care prices would plummet, more people would opt for self-employment, and a lot more businesses would be created.

Patrick Chisholm is editor of PolicyDynamics.

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