May 28, 2009 / 2:34 PM / 11 years ago

Health system discourages innovation

(Corrects tax treatment of health benefits in paragraph 23)

Beds lie empty in the emergency room of Tulane University Hospital in New Orleans February 14, 2006. REUTERS/Lee Celano

By Andy Sullivan

WASHINGTON (Reuters) - Countless workers in the United States are trapped in jobs they would like to leave because they cannot get health insurance elsewhere, calcifying innovation and mobility in the world’s largest economy.

Daunted by health-care costs, a would-be technology entrepreneur in Texas decides not to start her own business. A communications expert in Washington decides not to strike out on his own. And a freelance magazine editor in Brooklyn decides to take a less satisfying corporate job.

“I would rather be freelancing, no question,” said Jessica Tolliver, a former editor who now works in public relations. “I got my work done in less time, because once I finished what I had to do, the time was my own.”

Economists call this phenomenon “job lock,” and studies suggest that it keeps between 20 percent and 50 percent of workers from leaving their current jobs.

Because health insurance is tied to employment in the United States, workers who leave their jobs can see health bills skyrocket if they strike out on their own or take a position with a company that offers fewer benefits. Workers who would like to retire early stay on, unable to qualify for the government’s Medicare program until they turn 65.

And those who have existing health problems may not be able to get coverage at all.

Job lock is difficult to measure because many employees don’t like to advertise their unhappiness. But economists and small-business advocates say it takes an enormous toll on productivity.


“We can definitely say that it’s slowing down the rate of innovation,” said Tim Kane, an economist with the Kauffman Foundation which promoted entrepreneurship.

For Mike, a Washington-based communications professional who did not want to use his last name, health costs may force him to pass up the chance to be his own boss at a time when he could easily pick up several major clients.

With two children at home, Mike said he was reluctant to abandon the generous benefits he gets at the trade group where he currently works. Self-employment would probably mean spending more for fewer benefits.

“I don’t want a bad event to knock me and my family out of the box,” he said. “It’s a real hurdle.”

As head of the National Federation of Independent Businesses, Todd Stottlemeyer frequently encountered would-be entrepreneurs who let their ideas go stale and their products languish on the workbench because they did not want to shoulder their own health care costs.

When he asked audiences if health insurance has affected their employment decisions, often half the hands in the room would go up.

“There are lots of factors that go into why somebody starts a business or doesn’t start a business: Do I have a good idea, do I have capital, do I have risk tolerance?,” said Stottlemeyer, now an executive at a hospital chain. “Being able to get health insurance ... should not be one of those determinant factors.”

Making insurance more affordable for the self-employed could lead to a wave of new businesses, one study suggests.

New Jersey saw a 14 to 20 percent rise in entrepreneurial activity due to a 1993 law making it easier for the self-employed to afford health insurance, a study by Philip DeCicca of McMaster University in Hamilton, Ontario found.

Roughly 60 percent of the U.S. population now gets its health coverage through work, but the system is increasingly strained due to rising costs.

Congress is working to overhaul the troubled system. The Democratic majority hopes to pass a law which President Barack Obama can sign by the end of the year. However, employer-based care is likely to remain a bedrock of any new approach.

The link between healthcare and jobs evolved during World War II, when the government imposed wage controls but allowed companies to adopt health-insurance plans to lure employees.

Small-business groups have often complained this unfairly tilts the playing field toward large employers that have the clout to negotiate rates that are 18 percent lower on average, according to the Commonwealth Fund.

Consequently, workers at small firms are much less likely to have health insurance. While 99 percent of companies that employ more than 200 employees offer health coverage, only 49 percent of companies that employ between 3 and 9 workers do so, according to the Henry J. Kaiser Family Foundation.

Part-time workers are also less likely to get benefits than full-time employees, according to Kaiser.

Self-employed workers face a further disadvantage because their health-insurance payments are subject to employment taxes, unlike companies that maintain a payroll.

As a freelancer, Tolliver could work from wherever she and take playground breaks with her daughters. But a $1,200 monthly healthcare bill ultimately led her to take a job where insurance only costs her $200 per month.

“It would be obnoxious to say were struggling to put food on the table. But that said, it was a lot of money.”

Editing by Alan Elsner

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