Photograph by Jim Krantz/Gallery Stock
Today marks the start of enrollment in the new health insurance exchanges, which will enable people without employer-sponsored health insurance to buy their own. A RAND working paper argues that by making it easier for self-employed people to obtain health insurance, the Affordable Care Act has “the potential to weaken entrepreneurship lock”–the unwillingness to strike out on one’s own for fear of being unable to obtain affordable coverage. The Robert Wood Johnson Foundation estimates that the law will boost the number of self-employed Americans by 11 percent–or 1.5 million people.
I’m skeptical. While some would-be entrepreneurs have remained in their jobs because of fear of losing health coverage, the number likely to make the transition to self-employment as a result of the ACA is far lower than the foundation’s estimate, according to my assessment of the numbers. Moreover, the new law will raise the cost of not obtaining coverage and make coverage more expensive for some, leading certain self-employed Americans to give up on entrepreneurial efforts. The increase in the number of people leaving self-employment in response to the law will offset an undeterminable rise in the number of people entering self-employment because of it.
The Robert Wood Johnson Foundation’s estimate of an 11 percent boost in self-employment derives from the RAND finding that self-employment rates increase 13 percent when people turn 65 and become eligible for Medicare coverage. The foundation arrived at its increase by applying RAND’s estimate to the “expected self-employment effect of the ACA in the 35 states without prior reforms of this type in the non-group market” and averaging it across all 50 states.
But getting from the Medicare effect to the change in the expected number of self-employed Americans once the ACA is fully implemented requires some major conceptual leaps. As Megan McCardle has pointed out, not all the difference in the odds of becoming self-employed at age 65, vs. 64, comes from the availability of Medicare. Such additional factors as the desire to reduce hours and the ability to tap pensions also play a role. As a result, the Medicare effect is unlikely to accurately estimate how much the ACA will boost Americans’ willingness to become self-employed.
Most would-be self-employed persons weren’t blocked from starting companies under the old health-care regime. They could have bought insurance on the open market. Many of those who chose to remain wage-employed did so because the cost of health insurance was much higher than what they paid to get employer-sponsored health-care coverage.
Similarly, the degree to which the new exchanges will “unleash self-employment” depends a lot on the difference between what the 68 percent of employed Americans covered by employer-based health insurance would pay for that insurance as self-employed individuals and what they currently pay as employees.
Because employers pay most of the cost of employee health insurance–71 percent (PDF) of the premiums for family coverage–many people will pay more for the same level of coverage if they are self-employed, even after factoring the benefits of government subsidies. As a result, many would-be entrepreneurs will remain employed by others, despite the new health insurance exchanges.
The law doesn’t just affect the decision to become self-employed; it also affects the decision to remain self-employed. Consider the individual mandate. Currently, 54 percent of self-employed workers do not have health insurance, according to Census data. While some of those people would like to have health insurance and can’t get it, others–particularly those who are young and healthy–just want to avoid the cost. Under the ACA, the penalty for not obtaining health insurance will rise to the larger of $695 per adult and $347.50 per child, or 2.5 percent of household income. Basic economics tells us that some the 8 million self-employed people without health insurance will give up working for themselves if their self-employment income is lowered by the amount of the self-insurance tax penalty.
In short, the evidence simply isn’t there to predict that Obamacare will boost self-employment by 1.5 million people. In a 2011 memo, the nonpartisan Governmental Accountability Office identified only four academic studies that addressed the entrepreneurial job lock question–not enough, it implied, to assess the magnitude of the effect, let alone to predict the degree to which provisions of the ACA will stimulate self-employment.
The good news is that the Obamacare experiment will lead to numerous academic studies to assess the effect of changes to the health-care system on Americans’ willingness to go into business for themselves. Of course, that news may be heartening only to academic economists.