Health insurance and the supply of entrepreneurs: New evidence from the ACA

The difficultly and expense of purchasing health insurance as an individual or small business is claimed to be one major barrier to entrepreneurship in the United States. This paper takes advantage of the natural experiment provided by the Affordable Care Act’s dependent coverage mandate, which allowed many 19-25 year olds to acquire health insurance independently of their employment, to estimate the number of potential entrepreneurs discouraged by the current system of employer-based health insurance. A difference-in-difference strategy using American Community Survey data finds that the dependent coverage mandate led to a 6-9% increase in self-employment among the treated group. The difference in difference strategy uses control groups (19-25 year olds before the mandate took effect, and 27-33 year olds) to isolate the true effect of the mandates. This helps to prevent attributing to the mandate what is really due to changing economic conditions, or young adults consistently starting fewer businesses than their older counterparts. The effect is found to be larger for women and for unincorporated businesses.

An instrumental variables strategy using Current Population Survey data finds that those actually receiving health insurance coverage as dependents were drastically more likely to start businesses.

The prepondereance of evidence presented in this paper suggests that a statistically and economically significant number of potential entrepreneurs are deterred from self-employment due to the current employer-based health insurance system. When 19-25 year-olds gained access to health insurance seperate from their employment, many chose to start businesses. But most people over 25 do not get the same opportunity. This means that the health insurance system still pushes people away from self-employment.