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Universal health care could boost economy

Coverage through employers, economists argue, hinders the creation of enterprise.

Entrepreneur Cheryl Ann Wadlington of Evoluer Image Consultants in Old City. "I would love to be able to expand," she said."In order to stay in business, you have to develop. Because of the health-care situation right now, we're unable to do that."
Entrepreneur Cheryl Ann Wadlington of Evoluer Image Consultants in Old City. "I would love to be able to expand," she said."In order to stay in business, you have to develop. Because of the health-care situation right now, we're unable to do that."Read moreAPRIL SAUL / Staff Photographer

Imagine living in a society where reliable police and fire protection were available only to those who worked for the largest employers. In this fictional country, people with enough money might be able to buy personal protection - but perhaps not if they'd suffered a burglary five years ago, or once called 911 for a kitchen fire.

Would people with good ideas and a little bit of money be willing to give up personal security for the chance to start their own businesses? Or would they cling to the safety promised by a job at a big company or institution?

Substitute health insurance for police and fire protection, and you have one of the best - and least-heralded - arguments for universal health care, according to a small but growing number of economists.

It is an argument with potential appeal across traditional partisan boundaries: that severing the link between reliable health insurance and employment could unleash a wave of pent-up entrepreneurial energy, much as conservatives often argue that cutting marginal tax rates stimulates the economy.

One who makes the case is Jonathan Gruber, an economist at the Massachusetts Institute of Technology. Gruber says the evidence that universal coverage would spur economic growth is limited, but "the logic is absolutely convincing - the logic is impeccable."

"The example I think of is the 50-year-old engineer at IBM whose wife is a cancer survivor and who wants to start his own company," Gruber said. "He's just not going to do it in today's world, because he just can't take that chance on health insurance. In a world of health reform, he can do that."

The basic argument is that two developments since the mid-20th century, together, are slowing down U.S. economic growth much as a sea anchor slows down a ship.

One of them is the link between health insurance and employment - a historical accident tied to World War II-era wage-and-price controls. Barred from offering pay raises, U.S. businesses began to offer health insurance as a "fringe" benefit.

The other is the rapid advance of medical care, which makes it possible to treat diseases and injuries that were once considered death sentences. Most Americans now view health insurance not as a fringe but as a necessity.

Gruber and others say those parallel developments are distorting the free-spirited market that made America an economic powerhouse.

"We think it's a major impediment to growth," said Robert E. Litan, vice president for research and policy at the Ewing Marion Kauffman Foundation, which promotes entrepreneurship. "There's so much logic that supports it, it's almost impossible to deny."

The nub of the idea is basic market theory: that society as a whole benefits because some people take entrepreneurial risks based on how they weigh potential demand for the goods or services they create. Nor is that just theory. Although many new businesses fail, a wealth of data shows that small businesses are a primary source of job creation.

So what happens if some fraction of would-be entrepreneurs is scared off by a factor unrelated to their business prospects? Then the economy as a whole must be hurt, these economists say.

If that is true, why isn't this argument made more prominently - especially if faster growth could bring higher tax revenue to offset the increased costs? During the current health-care debate, economic arguments have centered on the benefits of controlling expenses vs. the costs of expanding coverage.

One reason may be that it hits at turbulent political crosscurrents. Those who care most about business and entrepreneurship tend to be wary of anything that suggests new spending or mandates. Those who care most about coverage tend to focus on protecting the nation's nearly 50 million uninsured, not boosting the economy.

Moreover, the problem could theoretically be addressed by solutions other than universal coverage - say, by creating special "entrepreneurs' policies."

But some say those pushing for universal access to coverage, including the Obama administration, are overlooking an argument with potentially strong bipartisan appeal.

"I think the administration makes a mistake by not making this argument, because I think it would dramatically enhance their appeal to the entrepreneurial and small-business community," Litan said. "Every small-business owner knows about this problem."

A case in point

Sandy Khaund makes the same argument from a different perspective - that of an entrepreneur who took the plunge and sees why others could be scared away.

The son of Indian immigrants and a 2001 graduate of the University of Pennsylvania's Wharton School, Khaund had always dreamed of starting his own software company. After six years at Microsoft and a year with an Internet start-up, he decided last fall that it was time to try.

His new company, Irynsoft, operates from a small office about a mile from his home in Walnut Creek, Calif.

Khaund, 37, said his wife's main hesitation was health coverage, especially because the couple had two young children and Khaund had required surgery last year to correct a heart-valve problem. But he assured her they could buy 18 months of coverage under his former employer's plan through COBRA.

That 1986 federal law has helped many early-stage entrepreneurs. But as Khaund soon learned, it can have a fatal flaw. His former employer sold out to a Swedish company, and its health-care plan was dissolved.

Though Khaund and his two daughters were initially rejected for private coverage, California state law at least enabled him to buy high-deductible insurance for about $19,200 a year. Appeals have since brought the total closer to $13,000.

But Khaund still worries whether he can go forward - especially after a former colleague, who was working nights and weekends for Irynsoft and was slated to be its chief operating officer, announced that he needed to keep his large-company job for insurance reasons. At 53 and with three children, he told Khaund that health coverage was the main obstacle.

"He could overcome the income concerns, cut back a little bit, and dip into savings," Khaund said. "But you can't cut back on health care."

Last month, Khaund wrote a letter to Obama describing his experience and said he worried that America's "gung-ho spirit" was being undermined, ironically, by those who "oppose universal health care because, they suggest, it's socialism."

"Should I just abandon my entrepreneurial dreams and work for a big company?" Khaund asked. "Can you imagine if Microsoft or Apple didn't get started because Bill Gates or Steve Jobs had a 'preexisting condition'?"

Cheryl Ann Wadlington faces similar concerns. She started her Old City firm, Evoluer Image Consultants, five years ago and wants to add staff. But the cost of health care has so far made that impossible.

Wadlington handles all administrative duties herself and has had to postpone plans to offer extra services to her individual and corporate clients in Philadelphia and New York. Instead, she relies on 10 people who work as independent contractors.

"I would love to be able to expand - I'd like to hire five people," Wadlington said. "In order to stay in business, you have to develop. Because of the health-care situation right now, we're unable to do that."

Studies for and against

Concern that employer-based health care discourages entrepreneurial risk has been around at least since the 1990s, when U.S. politicians last considered revamping the health insurance system. But hard evidence has been limited and conflicting.

One 1996 study, cowritten by Douglas Holtz-Eakin, later a top economic adviser to President George W. Bush and presidential candidate John McCain, found no statistically significant evidence that the employer-based system was impeding entrepreneurship.

At least two more recent studies have reached different conclusions. One as-yet-unpublished study, cowritten by Rand Corp. economist Susan Gates, calls the phenomenon "entrepreneurship lock."

Gates said in an interview that solving entrepreneurship lock could spur the U.S. economy enough to at least partly pay for the costs of subsidizing universal coverage. But she said it was impossible to predict the overall effect, in part because it was unclear whether the additional entrepreneurs would be better or worse than those already willing to take such leaps.

Gates said today's system might be discouraging the people best-suited to running businesses - prudent, thoughtful risk-takers - in favor of those convinced "they're never going to get sick and have to worry about their health."

"If you think that those are the people who are going to be deterred from going into entrepreneurship, and you also think that those are the people who should be starting their own businesses because they're not wild risk-takers or delusional, then the system might in fact be really crippling economic activity," Gates said.

To Gruber, the most important aspect of the entrepreneurship research may be its value in refuting arguments that offering any form of universal health care would harm the U.S. economy.

As long as health care is paid for "in a smart way," Gruber said, "it's unambiguous that it's going to be good for the economy."