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?
I wanted to give a bump to Angus McRae. His firm helped me choose a health insurance plan when I burned the boats late last year. They were very helpful and made sure the application process went smoothly. Angus is a great supporter of the entrepreneur community in Atlanta and would highly recommend his firm for anybody looking for health or other benefits packages.
Another shout-out to Angus McRae and his team (especially Cindy). They are extremely knowledgeable and incredibly responsive - platinum level customer service. I was lucky enough to stumble across them early at N2 Broadband, and they took us from 6 people in 2000 to 200 people in 2006 and were an absolute pleasure to deal with every single step of the way. If your company needs to provide health benefits to your people, this should be your first call. They are absolutely the best, and they don’t cost any more than any other health benefits broker/advisor. Angus McRae rocks.
I’m honored by everyone’s kind words! Sanjay raises an interesting question: Can economies be gained by having a VC aggregate its portfolio companies under one welfare benefit plan?
Some rambling thoughts…
1. 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.
2. Does the VC want to take on the fiduciary liability associated with becoming a plan sponsor?
3. Understand that some employers will end up subsidizing the premiums of the others. For example, Employer A has a sick employee population and B has a healthy one. Put these two companies under one welfare benefit plan and you will find that B is subsidizing the premiums of A. Eventually B will realize that it can get better rates outside the aggregated plan.
4. Geography may play a role in the ability to form a plan that best fits the needs of each employer. One of our clients is a VC with employers in Georgia, California, Pennsylvania and Tennessee. While there are insurers/plans that would easily serve all of these locations, a local plan may be a better fit for one or more of these groups.
5. Entries and Exits. Insurers want a predictable risk. They will typically reserve the right to re-rate the group if a new affiliated employer is added. And, renewal rates will reflect the change in population if an employer exits the aggregated group.
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.
For VCs with smaller portfolios a better route my be found in pulling together a list of preferred vendors and making available some experienced and trusted advisors.
Any thoughts from the VC community?