Starting a business has always been a risky financial undertaking. With the huge rise in health insurance costs over the last decade, I’m increasingly worried we have created an enormous new obstacle that discourages and slows down the growth trajectory of new businesses.
This post is not about rehashing the debates over the federal healthcare reform known as the Patient Protection and Affordable Care Act (PPACA), though there is much for entrepreneurs to learn about this new law. Instead, I hope to offer a practical view of the issues health insurance costs pose to entrepreneurs.
I am CEO of my own company, Biotech Stock Research, LLC, founded in 1999. So this is an issue I face personally as I try to build this company along with my business partner Alan Leong. We’ve also spent more than 10 years together teaching entrepreneurship to students at the University of Washington Bothell, and encouraging them to think hard about all the various risks and benefits that go with creating their own companies. We helped these students launch more than 90 companies in the decade we ran the program, making it one of the most successful undergraduate programs in the nation at company formation.
The program we created evolved with our students’ needs. A decade ago, everyone was looking for the prototypical $100 million-in-5-years VC-backed idea. More recently, we saw businesses focused on launching via bootstraps and/or with small amounts of seed funding from friends and family members. These more recent ideas were the kinds of small businesses that form the backbone of economic activity in America.
What really worries me is how many of today’s entrepreneurs might never get a chance to pursue their dreams at a startup company, because they just can’t afford health insurance.
I’m 44 and in very good health. I’ve never smoked a day in my life and have no particular familial or genetic health risks. My insurer, Regence Blue Cross, nevertheless charges me some $6,000 a year for health insurance. This is three times what they charged me a decade ago. My deductible for this expensive plan is five times higher than it was a decade ago, plus it comes with a substantial copay that wasn’t present previously.
For a bootstrapped company, this insurance cost is a huge barrier to starting a business. As I mentioned above, this article is not about the new federal healthcare reform law, and the reason for this cost increase has nothing to do with that historic piece of legislation.
Given the state of health insurance, let’s do the math on what this means to startups. A three-person startup will need to find cash from savings, credit cards, friends, or rapid revenues of some $15-18,000/year just for health insurance. That’s not a ton of money in a venture-backed business model, but my experience is the VC-backed business is not what most entrepreneurs today are shooting for. They’re looking for a bootstrapped model they can fund themselves.
I am worried healthcare costs are proving to be a big barrier to anyone considering launching their own business. In addition to salaries, legal costs, and product development costs, that $18,000 is a big bite out of a startup budget.
Entrepreneurs, as a species, are inherently adaptable. I’ve seen some
