Health Reform Expected to Untether Job-Locked Entrepreneurs

As the health reforms signed into law this week begin to take effect over the next four years, one consequence to watch is to what extent would-be entrepreneurs feel comfortable leaving their jobs to start businesses. If people can get affordable insurance outside of their jobs, some number of workers who mainly stay in their jobs for health benefits will leave to start small companies or work for themselves, the reasoning goes.

The job lock factor is particularly salient for those with pre-existing conditions or families where one spouse’s employer insurance covers the whole family — right now buying insurance on the open market can be prohibitively expensive or impossible for people in these situations. The new law won’t unleash a flood of entrepreneurs immediately because many changes won’t take effect for several years, but it is likely to shift how and when people decide to start new businesses in the years ahead.

The evidence for “job lock” is strong. One example: Americans’ likelihood of self-employment jumps when they turn 65 and become eligible for Medicare, according to research by Robert Fairlie of UC Santa Cruz, Kanika Kapur of University College Dublin, and Susan Gates of the RAND Corporation. “Business ownership rates increase from 24.6 percent for those just under age 65 to 28.0 percent for those just over age 65,” they write, and no similar uptick occurs at other ages between 55-75 that the researchers examined. That paper also found that job-lock was less of a barrier to entrepreneurship if a person’s spouse had employer coverage. “People who have spouses with health insurance are more likely to start businesses,” Fairlie told me.

We have to ask also whether reducing job lock will result in new firms that create jobs, or if most of the effect will be people working for themselves. The Atlantic’s Megan McArdle asks good questions on this point, and concludes:

On net, I’d suspect that this will be positive for entrepreneurship—but I don’t know that this will translate into a lot more growth. Enabling people to become self-employed is a fine thing, but it is not the same as enabling them to start transformative new businesses.

Economist Scott Shane, writing in BusinessWeek in January, similarly says that less job lock will create new firms and jobs. But that growth may be balanced by job losses resulting from reform as well, as the bill requires firms with 50 employees to provide health insurance or pay penalties. (It’s important to note that some of the job loss estimates are based on different versions of reform than the one passed into law.)

Backers of health reform certainly hope it will help reduce job lock. In her speech to the House of Representatives before voting on the law, Speaker Nancy Pelosi said:

I believe that this legislation will unleash tremendous entrepreneurial power into our economy. … Imagine an economy where people could follow their passions and their talent without having to worry that their children would not have health insurance, that if they had a child with diabetes who was bipolar or pre-existing medical condition in their family, that they would be job-locked. Under this bill, their entrepreneurial spirit will be unleashed.

There’s a flip side to this for employers to consider: Some of their most talented, ambitious, and entrepreneurial employees have one less reason to stick around once they can get health insurance elsewhere.

“That is something that was really holding a lot of people who were already feeling not a lot of loyalty to companies,” says Pamela Slim, a business coach and author of Escape from Cubicle Nation. “That is one of the most common comments I hear from people: ‘I’d love to quit my job … but it really is hard to give up the benefits.’”

By the time health reform fully takes effect in 2014, we’re likely to have a better economy and stronger job market. At that point, if people who have long nurtured entrepreneurial ambitions can get affordable health insurance outside of their employers, there will be little to stop them from quitting.