Decidedly unhealthy for entrepreneurship

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? Health insurance.

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 it is quite 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 special-interest tax break. 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 health insurance on their own, but it 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, healthcare providers and insurance companies would be forced to compete much more aggressively based on price and quality. A diversity of plans would sprout tailored to a diversity of individual needs. And many people would opt for large-expense coverage and pay out-of-pocket for smaller expenses.

Right now, health care providers have little reason 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, points out that the same surgeries performed on humans are performed on dogs for about one-tenth the price. This is mainly because veterinary care providers are forced to aggressively compete for cost-conscious buyers. Were the same to happen with human healthcare, prices probably would not be as low as those of veterinary care, but they still would fall considerably.

So if everyone bought 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? Good 'ole government intervention in the marketplace. During World War II, when wage and price controls prevented salaries from being raised, employers started to offer health insurance to attract workers. Politicians and IRS officials then decided to institute 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.

Some people want to try to remedy the problem of sky-high health care prices by nationalizing our system. This would be starting a huge new government program to try to correct the wrongs of another government program, and would only make things a lot worse.

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), many more people would shop around for it on their own, healthcare prices would plummet, more people would opt for self-employment, and a lot more businesses would be created.

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