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Small Business Economics

09.05.2024 | Research article

The cost of health insurance and entry into entrepreneurship

verfasst von: Frank M. Fossen, Mobarak Hossain, Sankar Mukhopadhyay, Peter Toth

Erschienen in: Small Business Economics

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Abstract

Unavailable or expensive health insurance may hinder the transition of individuals from paid employment to entrepreneurship, a phenomenon called entrepreneurship lock. The literature argues that the guaranteed availability of health insurance introduced by the Affordable Care Act (ACA) in the USA in 2010 could reduce this barrier to entrepreneurship and thereby increase entrepreneurial activity. In this paper, we investigate to what extent entrepreneurship lock exists due to health insurance costs even when the availability of health insurance is given. We use individual-level data from the Current Population Survey (CPS-ASEC) combined with county-level panel data on health insurance costs in local health insurance exchanges (HIX) introduced by the ACA to estimate county-treatment fixed effects regressions. The results indicate that a hike in the premium of the benchmark HIX plan by 1% decreases the entry rate into self-employment by 0.76%. Men react more strongly to local HIX premiums than women. There is a stronger effect on starting incorporated businesses than on starting unincorporated businesses, which suggests that the additional businesses triggered by lower HIX premiums are of relatively high quality.

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Medicaid covers 15% of non-elderly adults, primarily low-income individuals, and Medicare 2% among those below 65 years of age, mostly disabled individuals. The remaining non-elderly adults not covered by EPHI either buy health insurance from the private non-group market (8%) or remain uninsured (13%), according to the Kaiser Family Foundation (2019).

Following the literature (e.g., Holtz-Eakin et al. 1996; Fairlie et al., 2011; Bailey, 2017), we use self-employment in the main job as a measurable proxy for entrepreneurship. The self-employed in our sample include business owners with and without employees.

This is a reminiscence to the job lock literature (Madrian, 1994; Gilleskie & Lutz, 2002) which is concerned with hindered mobility of paid employees due to EPHI.

In addition, Heim and Lurie (2014) and Li et al. (2017) exploit the increased availability of health insurance through state-level insurance mandates instead of the federal ACA to test whether “entrepreneurship lock” exists. Lee and Winters (2022) compare states after Medicaid expansion to states that have not expanded Medicaid in a given year and do not find a significant effect on self-employment rates.

The ACA also imposed a health insurance mandate for all legal residents of the USA to reduce adverse selection and to keep the premiums of health insurances affordable. Non-compliant individuals were assessed with a tax penalty, but the Tax Cut and Jobs Act of 2017 reduced the individual mandate penalty to zero.

Only five states charge a small Medicaid premium.

The description of the subsidies applies to our sample period. These subsidies were expanded first by the ARPA of 2021 and then extended by the Inflation Reduction Act of 2022. We discuss the implications in Section 6.

Measurement error in the HIX premium may lead to an underestimation of the effect in absolute terms (attenuation bias).

Most employees who are covered through their spouse’s EPHI are in this situation because their own employer does not offer EPHI. Many employers restrict spousal coverage to spouses who are not offered coverage through their own employer. Some employers also impose a spousal surcharge, i.e., spouses may pay a higher premium.

Some lines start in 2015 due to missing values in 2014. Two outliers with high premiums are visible in 2017; we remove these two counties (located in Arizona) in a robustness check.

In a robustness check, we also estimate a model without county$\times $treatment fixed effects, additionally exploiting cross-sectional variation in HIX premiums. This increases the efficiency of the estimation, but this robustness check requires the stronger identifying assumption that unobserved differences between counties in the propensity to become self-employed are uncorrelated with the local HIX premiums.

For example, the ratio of the HIX premium (before APTC) to the EPHI premium (after employer subsidy) varies from 2.47 in Minnesota to 7.80 in Wyoming.

As we control for county-level health in our regressions, this particular correlation should not bias our estimated treatment effect.

It would be interesting to investigate whether the effect of the HIX premium changed due to the repeal of the health insurance mandate, but we have only one wave of entries in our sample after this reform (entries between 2018 and 2019), so we leave this research question for future research.

If there was a positive relationship for the control group, for example, because higher premiums might be correlated with business opportunities in a county, this would not invalidate our identification strategy, but reinforce the importance of using a control group to correct for any such effects, as we do.

In all these robustness checks, we include the same control variables as in Table 4 if not otherwise stated; the full results are available from the authors on request.

We thank the anonymous reviewers for suggesting some of the robustness checks and heterogeneity analyses to us.

The standard deviation over counties and the years of our observation period of the median silver plan premium for 27-year-old persons (which we use for respondents below 40 years of age) is only $82.8, whereas the standard deviation of the median silver plan premium for 50-year-old persons (used for respondents who are at least 40 years old) is $134.3.

The treatment effect is also insignificant in two additional regressions where we only consider entry into self-employment while also moving across counties within a state or while also moving across states.

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Titel: The cost of health insurance and entry into entrepreneurship
verfasst von: Frank M. Fossen
Mobarak Hossain
Sankar Mukhopadhyay
Peter Toth
Publikationsdatum: 09.05.2024
Verlag: Springer US
Erschienen in: Small Business Economics
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-024-00927-x

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