Entrepreneurship and the consequences of healthcare policy

DOIhttps://doi.org/10.1108/JEPP-06-2012-0031
Published date14 April 2014
Pages141-159
Date14 April 2014
AuthorRobert Salvino,Michael Tasto,Gregory Randolph
Subject MatterStrategy,Entrepreneurship,Business climate/policy
Entrepreneurship and the
consequences of healthcare policy
Robert Salvino
BB&T Center for Economic and Community Development,
Wall College of Business, Coastal Carolina University, Conway,
South Carolina, USA, and
Michael Tasto and Gregory Randolph
Department of Finance and Economics, Southern New Hampshire University,
Manchester, New Hampshire, UK
Abstract
Purpose – The purpose of this paper is to examine the long-r un impact of federal government
healthcare subsidies on the level of entrepreneurship as measured by self-employment.
Design/methodology/approach – Using annual healthcare and employment data from 1948
through 1999, the paper empirically examines the relationship between the growth in employer-
provided healthcare and the rate of self-employment as a share of the non-agriculture, civilian
labor force.
Findings – The regression results imply that there is a consistent effect that has appeared over
time – where federal healthcare subsidies have disproportionately benefitted larger firms, contributing
to the decline in the rate of self-employment, within-firm innovation, and factor mobility over time.
Research limitations/implications – The research in this study is limited by the examination of
self-employment only and a constant institutional structure across all states, only varying across time
for the entire USA. In addition, an empirical study looking at how the value of healthcare benefits have
changed over time – vs the sole question in this study that depends upon whether or not an individual
is covered or not would be very useful in determining the true effect on an entrepreneur.
Social implications – Reducing or removing the layers of healthcare subsidies would bring about an
increase in the transparency of the wage-productivity relationship and a more efficient allocation of
labor and entrepreneurial ability across firm sizes.
Originality/value – This paper presents empirical evidence supporting specific improvements to
national healthcare policy at a time when such policy is undergoing significant change with
consequences for entrepreneurial decision making.
Keywords Entrepreneurship, Institutions, Healthcare, Self-employment
Paper type Research p aper
1. Introduction
Entrepreneurship is essential for long-r un economic growth, driving the process of
discovery and innovation, seeking new opportunities through countless trials and
errors, learning from failure and profiting from suc cess (Kirzner, 1997). However,
the entrepreneur’s contribution to society varies with the productiveness of the
endeavors the entrepreneur pursues. Differing institutional frameworks across time
and place influence the varying proportions of productive, unproductive an d
destructive entrepreneurship, and the rules of the economic game often change,
impacting productivity, innovation, and economic prosperity (Baumol, 1990).
Research suggests that entrepreneurship and innovation are cor related with
economic growth, thus public policies affecting the allocation of entrepreneurial
resources indirectly impact economic growth. Recent studies have examined the
link between employer-provided health insurance and entrepreneurship directly.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2045-2101.htm
Received 29 June 2012
Revised 24 August 2012
Accepted 29 August 2012
Journal of Entrepreneurship and
Public Policy
Vol. 3 No.1, 2014
pp. 141-159
rEmeraldGroup Publishing Limited
2045-2101
DOI 10.1108/JEPP-06-2012-0031
141
Consequences of
healthcare policy
Fairlie et al. (2011) finds that employer provided-health insurance appears to influence
the decision to create a business and deters small business creation in general.
However, other previous research finds mixed results. While Wellington (2001)
finds that individuals with access to their spouse’s health insurance are more likely to
be self-employed, other studies such as Holtz-Eakin et al. (1996) are unable to find
a significant impact of health insurance on worker transitions from firm employment
to self-employment. This paper extends this research to examine the long-run impact
of employer-provided healthcare policy on the allocation of entrepreneurship over the
last century in the USA. Has a century of government policies distorted the allocation
of labor and entrepreneurial ability? In theory this would create an inefficient allocation
constraining innovation, productivity, and consequently long-ter m economic growth.
Obtaining affordable healthcare insurance has been and will continue to be an
important issue facing individuals and families in our society. The empirical question
examined in this paper tries to determine the relative importan ce of these benefits
to members of our society. In recent history, there have been major changes in the
government’s policy objectives for healthcare insu rance and these p olicies have been
unbalanced in favor of decreasing the costs to larger firms offering healthcare
insurance – at the expense of the self-employed. We use the percent of the non-
agricultural workforce that are self-employed as a proxy measure of the number of
entrepreneurs in our society. As the data will show – the percent of self-employed has
declined over time, while these new government p olicies have been enacted. So, the
empirical question here is whether or not differences in healthcare insu rance costs
are a factor contributing to the decline of individuals becoming entrepreneurs.
The last half of the twentieth century reflects a gradual redistribution of human
capital, either of labor or entrepreneurial ability, from self-employment and
employment in small firms to employment in larger firms, marked by a 45 percent
drop in the percentage of self-employed persons over the period (Shane, 2008). This
transition coincides with the development and growth of employee benefits over
the same period. Prior to 1930 virtually no one had any form of healthc are insurance
(Scofea, 1994). There was less relative demand for formalized health care, and hospitals
across the country had close to 50 percent vacancy rates fo r their beds. In 1929, the
founder of what would become BlueCross BlueShield (BCBS) came up with a solution
to hospitals’ financial dilemmas, and the first pre-paid hospital plans were offered to
consumers in Baylor University’s hospital system. Unions recognized the appeal of
pre-paid hospital care, and in 1935 the National Labor Relations Act was passed,
requiring management to bargain over conditions, including benefits. By 1940, almost
10 percent of the population now had some form of prepaid hospital care and BCBS
had close to 50 percent of the market (Health Insurance Association of America
(HIAA), 1999)[1]. Additional government policies enacted over the coming decades
promoted the growth of employer-provided healthcare, and by 1979, 97 percent of
medium to large-firm employees were participating in their employers’ major medical
care plans[2].
Medium to large-firms experienced tremendous growth over this period for
various reasons. Influenced by mainstream macroeconomic theory, post-Second World
War era economic policy favored large corporations for their p erceived efficiency
advantages over small firms. Tax policy in the USA, in particular, has largely favored
wage and salary workers since the 1950’s. The self-employed were not able to deduct
health care costs until 1987 (Bruce, 2000). At the same time, large corporations have
generally been able to offer more generous healthcare benefits, because having more
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