Angus McRae had some interesting words about my post on healthcare issues for entrepreneurs so I thought I’d explore them some and make sure everyone got a chance to read his thoughts.
Two important points, I think, come from Angus’ comment. First,
Does the VC want to take on the fiduciary liability associated with becoming a plan sponsor?
And second,
In my mind the viability of the idea is dependent on the size of the VC’s portfolio and its willingness to take on the responsibility of managing the benefits of a varied group of employers.
Traditionally VCs have just provided money and insight and each portfolio company would make other decisions independent of other portfolio companies. Not too long ago, one VC (I’ve forgotten which one now - if you remember, post in the comments) acquired an executive recruiting firm so as to (presumably) help portfolio companies recruit better talent. This clearly leads to value creation for both the entrepreneur and the VC if better employees can be recruited more quickly for the startup.
I think this same thing applies to health care benefits. Having benefits isn’t a competitive benefit and doesn’t create value in the startup. It’s just another thing that distracts the entrepreneur from the important task at hand. The problem, though, may be this issue that Angus points out:
Insurers require there to be common ownership between the employers. This requirement may differ from carrier to carrier, but you should find the Internal Revenue Code definition of a “controlled group of corporations” to be safe ground.
Clearly I’m not a lawyer nor do I know the Internal Revenue Code. If this is the reason that this can’t happen, I think entrepreneurs and investors need to start lobbying their congressional representatives
for help in rectifying this situation.
Published on January 15, 2008
in Events.
Knox Massey made a mention on his blog for an event called “Starting an Angel Organization” (yes, even after all that I’m still willing to make this reference). The idea with the event is to help folks who might want to start a new angel group or join an existing angel group. Like I’ve discussed many times, more access to capital will help improve the ability for local entrepreneurs to focus on value creation instead of fund raising. Also, if entrepreneurs believe they can raise money and be based here, they won’t be tempted to leave.
Unfortunately, I heard about this event too late. The deadline to apply for this event is today. I’ve sent in my materials and should be good to go but if you’re at all interested (the event is on January 24th and it runs all day) go and register right away!
This is a pretty funny list of VC personalities to avoid. I’d say most, if not all, of these extend to angels too. Now who is going to come up with a list of entrepreneur personalities to avoid?
Not too long ago I was speaking to a local entrepreneur and we hit the subject of health care costs for entrepreneurs and individuals. I started off by lamenting the high costs I’ve been paying as a temporarily retired entrepreneur and how hard it is to get health insurance coverage. In fact, as I found out, I can’t switch health insurance plans without being subject to at least a one year pre-existing condition clause. So I’m stuck on the plan that I currently have (not great but it’s expensive and there is no HSA option). Fortunately I’m in a position that this isn’t a killer hit for me (cost wise) but I can easily see how it is for other people.
We kept talking about how this singular issue keeps a lot of people away from entrepreneurship and startups. This entrepreneur mentioned that there was a person that he/she knew who was brilliant and wanted to do a startup but was stuck at a local large corporation because of health issues with his/her spouse. Doing a startup would have put this person’s family in economic jeopardy.
I know I’ve dished a lot about how fund raising is keeping good startups from getting started. But maybe that really isn’t the whole story as others have pointed out. Getting health insurance is painful and expensive and I imagine that it has kept more than a few people away from starting companies or doing something entrepreneurial. Maybe health insurance is keeping our entrepreneurial economy from achieving the levels that it should or can.
So what can we do about this? Maybe investors and VCs need to think about how they can obtain health insurance plans for their entire portfolio of companies. That would definitely be a value added service when you’re taking money from an investor group or firm. This type of approach would help reduce the chance (or at least the severity) of premium hikes which can easily happen in small companies. There were two years at Digital Envoy where we had a handful of employees who had kids during the same time frame (it was in the water, I think). Consequently our premiums went through the roof and I think we switched insurance carriers both times to reduce the severity of the hike. That was painful for the folks managing the plan and for all of the employees as well.
If you don’t know, insurance companies target to pull in at least X% in premiums than they pay out in benefits. X is some random number that is likely dictated by government (I haven’t looked into this fully so I don’t know the precise details). From what I recall, I had heard my previous insurance company was looking for X to be 5% or 6%. Wouldn’t it be nice to be in a business where you’re guaranteed to make a specified profit margin?
As your insured employee population grows, you have less likelihood that a large percentage of the insured employees are going to have a large health care expense in the same year. You also have employees that are in great health whose premiums “pay for” those who have large health expenses for whatever reason. For startups, the only viable player that is in a position to do this type of aggregation is the investor group and/or the venture capital firm. Maybe there are legal reasons that this can’t happen. If so, we should get the government involved. There is only one group that could possibly oppose this - the insurance companies. They’ll lose the ability to charge small companies more for their insurance premiums. For entrepreneurs this type of aggregation will save them money on insurance and for investors saving money on insurance means capital can be spent on real value creation instead of overhead.
One final note. As I’ve been dealing with this issue, I decided to drop an email to Angus McRae. Angus was a sponsor of Startup Weekend Atlanta which is how I knew about him. I dropped him a note about my situation and he replied very fully and gave me a lot of good information. On top of that, he didn’t charge me a dime to do it and he didn’t try to sell me anything. That’s what I call helping out the community and he, and his firm, get a big thumbs up from me. He hasn’t paid for this mention and he isn’t a sponsor of the blog. He’s just a helpful guy and that’s something I appreciate.
So, how do you deal with health insurance? Any tricks of the trade you want to share? Anyone have ideas as to how this can be made less of an issue for entrepreneurs and startups?