No Absolutes in the Affordable Care Act

Earlier this month, the U.S. Department of the Treasury delayed a key provision of Affordable Care Act (ACA)—the requirement that companies with more than 50 employees extend health insurance to their full-time staff. Then, the House of Representatives passed a bill extending the same relief to individuals, who under the law would start facing tax penalties if they go without health insurance next year. It prompted me to take a fresh look at progress overall.

It has been more than three years since the (ACA) was enacted on March 23, 2010, after a long, tough political battle over the best way to reform health care in the United States. The debate appears not to be settled.

One reason we created the Policy Dialogue on Entrepreneurship was to explore how different policy areas intersect with entrepreneurship and health care regulations is an important one, especially because in the United States, employers have historically borne the costs of workers’ health care. Therefore, any government action that affects health care costs directly impacts entrepreneurial action, particularly the scaling of entrepreneurial ventures. Simply put, health care costs represent a tax and administrative burden on employee hires.

To review what has happened, we have to remember the starting point for reform. The status quo in health care not only failed to provide affordable quality care to all Americans as most would agree is a national goal, it also undermined entrepreneurship. As I explained in previous posts: “small businesses pay a higher cost to offer health insurance to their employees because of the smaller size of their workforce and the lack of competition in the small group market.” As a result, some entrepreneurs have been dropping this benefit entirely to allow their startups to survive. Potential entrepreneurs in turn feel trapped in jobs simply because they secure health coverage for themselves and their families.

The Affordable Care Act is complex legislation. For example, the employer mandate provision, which is the subject of the recent delay, penalizes employers with more than 50 full-time workers who don’t offer health insurance. That employer responsibility was scheduled to begin in 2014 and has now been delayed until 2015. While most bootstrapping new starts typically hire well under 50 people, tying penalties to the number of full-time workers does not incentivize high impact startups to scale. It also adds time-consuming monthly reporting. It is after all those ventures that employ more than 50 people that drive job creation with net job growth occurring in the U.S. economy only through startup firms. A now well-known Kauffman Foundation study revealed that between 1977 and 2005, new firms added an average of 3 million jobs in their first year, while established firms combined were net job destroyers. In other words, young, growing firms constitute the backbone of our economy and should be encouraged to hire more people as they scale.

The ideal solution is to phase out the long history of employer-based insurance. It is a history written by accident. Employers began offering health insurance during World War II as a way of circumventing wage controls in place at the time. However, since this was not on the table during the recent debates that led to the ACA, the best hope for entrepreneurs and young, growing businesses lies in cost-containment measures for insurance premiums and regulations to increase the number of options available to small businesses and their employees (e.g. health care exchanges and the requirement that everyone be insured in order to widen the risk pool for insurance companies). But this month’s delay is evidence that such measures appear very difficult to implement and enforce. In fact, some analysts believe that, political calculations related to mid-term elections aside, the White House decision to delay the employer mandate comes as current implementation plans appeared doomed to falter.

Supporters of the ACA point out that, albeit of all the less-than-optimal political compromises, the legislation is the best way to improve the current system. It is also to some extent a stepping stone to health insurance being untied from employment and efforts should now focus on the next step for phasing out the system of employer-based insurance which is a clarification of the tax code such that employees can get the same tax benefits when they obtain a non-employer-based plan.

The good news is that, in the meantime, there is much more the government can do to help with the health care crisis unrelated to health insurance mandates. In fact, the best thing that government can do for improving access, value and quality of health care is to encourage entrepreneurial innovations that contain and even lower costs while improving medical technologies and services. This, as other bloggers have pointed out, is not something the public sector can achieve alone. It is as much the responsibility of health care entrepreneurs who can introduce innovations to the market, with fresh tools and new business models. Leveraging medical data is one key policy step in this regard, as explained in a 2012 Kauffman Foundation task force report: "Valuing Health Care: Improving Productivity and Quality" (you can also watch a video explanation)

If innovation in health care is key to solving what has become unsustainable, we would all do well to consider ourselves as part of the solution. With cost trends in U.S. health care at about 2.5 percentage points faster than the general rate of inflation, top-down policymaking can go only so far in improving American health care. All Americans, especially entrepreneurs, have a clear stake in settling this once and for all. Who knows, by the time policymakers figure out how to phase out employer-based insurance, America’s innovators and entrepreneurs may have figured out how the country’s health care providers can deliver better care for fewer dollars.


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