I’ve watched many a promising startup sprout in a university research lab. Many startups languish in the “great idea” phase — their founders graduate or get busy with something else. Some, however, actually thrive. The graduate students finish their dissertations and then become full-time entrepreneurs. One of their biggest challenges may surprise you. It’s not coming up with a business plan or understand their target markets. It’s getting good health insurance.
It’s a strange and unfortunate fact of life in the U.S. that without health insurance, your financial future (not to mention your health and well being) is at risk. Even if you are perfectly healthy but are hit by the proverbial bus while uninsured, the resulting medical bills would mean financial catastrophe. It’s possible to purchase health insurance on the open market but if you’re a solo entrepreneur trying to launch a small business or a cash-strapped startup, health insurance is prohibitively expensive.
This is why universities should help cover health insurance costs for startups based on university research that sign a contract for use of a university-owned patent. Now is the perfect time to do this. The U.S. Congress has passed the Patient Protection and Affordable Care Act (PPACA) and health care reforms are underway.
Before health care reform, solo entrepreneurs or small businesses did not have the negotiating power enjoyed by large organizations, hence their health care plans have tended to not be as good. As a result, startups have had trouble competing with bigger companies for good employees. Yet, good health insurance remains a make or break factor for prospective employees in choosing their employer.
In Geekwire, Marcelo Calbucci writes:
“As someone who has interviewed dozens of people over the last few months, I’m surprised how many candidates really care about the healthcare coverage we offer. Unless the candidate is unemployed, he or she has some kind of healthcare coverage, and although you can convert any kind of health insurance into a dollar value, some people feel the downgrade in health plan is a significant turn-off, even if the job includes better salary, bonus or a stock option plan with significant upside.” That’s where universities and states come in.
The PPACA covers lot of ground.* Much of it is controversial. Not all entrepreneur and small business communities are optimistic about the Act’s new mandates. One of the most contentious mandates of the Act is a requirement that any company with at least 50 full-time employees must provide its employees with health insurance to staff or pay fees.
The reality is that most new university startups won’t be affected by the mandate to provide health coverage — they’re just too small, nowhere near 50 people. In fact, smaller businesses, those with fewer than 25 employees, seem to be more optimistic that health care reform is good news. The Act will offer very small businesses tax breaks and other provisions that may make it easier for entrepreneurs and startups to buy reasonable health care for their employees and families.
Make being local a good thing
It’s clear that entrepreneurs and startups would benefit from some help paying their health insurance costs. What’s in it for the universities?
First, states already look to their regional universities to pitch in to help build the local economy. Startups headed by graduate students to bring university research to market are a cornerstone of many regional economic development strategies. Second, startups need health insurance. Third, startups will flock to regions that offer better health insurance plans.
Health insurance benefits are very local. Doctors, hospitals and prescription plans are handled near where the health insurance subscriber lives. Entrepreneurs and startups will gravitate to regions that offer entrepreneur-friendly health care plans and resources. In fact, just being able to give employees a good deal on health insurance will not only keep startups in a particular region, it will help them attract talented more workers and high quality jobs to the region.
How much would this cost?
All this sounds great, but like any wonderful plan, it involves somebody else’s money.
How much money are we talking here? First, let’s look at how much health insurance costs if you’re not snuggled into the warm and secure embrace of a large organization. Of course monthly payments vary by a person’s age, pre-existing health conditions, location and family situation. But on average, a solo entrepreneur can expect to pay about $500 a month (and much more if she or he has any complicating factors such as lots of children or a pre-existing health condition).
This adds up fast.
How about the health insurance costs for a startup with ten employees? At $500 a month per individual employee, $5,000 a month total, a ten-employee startup would have to pay roughly $60,000 a year to cover everyone’s health insurance.
For a 20-person startup, at $500 a month per person, the total monthly bill to cover everyone would be $10,000 a month. Typically, most small employers pay 80% and let their employees pick up the remaining 20%. So a 20-person startup burns through $8,000 a month just paying for health insurance. It would have to come up with $10,000 a month if it were to cover 100% of insurance costs. That’s about $96,000 a year if the startup pays 80% of the cost, or $120,000 if it pays the full bill.
Ouch. These are steep bills for small — sometimes tiny — tech companies that are just getting started. It’s pretty clear that startups would benefit from university help. But here’s where things get tricky: where is the university going to find an extra hundred thousand dollars a year to do this? …crickets…
If I were the person setting this up, here’s how I would do it. The first tough decision would be to set some parameters. I would start small. The university startups that would be first in line for health insurance funding would be the really small ones, say those with five or fewer employees. Next, I would set a time limit of two years total support.
To pay half the health insurance costs of ten five-employee startups a year, the total annual bill to the university would be about $150,000 a year. It could be lower if startups have fewer employees, or it’s a slow year for the launch of new startups.
Here’s how I calculated this. A startup employing five people would have to pay a total of $2,500 a month to take care of everybody’s health (assuming it’s $500 a month per employee). The annual bill for five people would be $2,500 times twelve months, or $30,000 a year. If a university were to subsidize half a startup’s health insurance costs, the resulting bill for a year of coverage would be about $15,000 a year.
How many new university startups are there each year? With the exception of a few outliers on either side of the curve, a typical research university spins off about five to ten new real startups a year. Let’s assume that half of these new startups employ five or fewer people, hence would qualify for this wonderful new program. So each year, the university would cover costs for five new startups, plus continue to fund five of last year’s startups.
Looked at another way, the costs of paying half the health insurance costs for new university startups is about as much as the annual cost of paying salary and benefits for a senior-level, full-time university employee. If a university decided to go big and cover all of the costs of health insurance for ten small startups, the annual bill would double — roughly $300,000 a year. That sort of money would be harder to find.
The good news is that many universities and states already spend money or offer resources to help local university startups grow. Some universities give new startups web support and legal services. Many universities give local startups low-cost office space in a university incubator. Business plan competitions that offer winners small cash prizes are another staple offering on the entrepreneur circuit.
Sometimes the offerings involve real money. Some states offer small businesses fund matching if they get a federal small business grant. Other states and university actually invest real money, either in exchange for equity in a startup, or just to be helpful. The state of Arizona and Arizonta State University plus some other partners just launched a startup accelerator program that offers startups built on university technology a package of $50,000 in cash and services. This is a bold step. Imagine if programs such as these were to add yet another option to the package: $15,000 worth of health insurance support per startup.
How many would-be entrepreneurs stay in their secure jobs in large organizations for the health insurance? The big leap into a startup involves not just giving up a secure paycheck, but can mean putting your life (and your family’s lives) on the line. Literally. It’s laudable that so many universities are building new programs to help local startups thrive. Why not offer startups the ultimate incentive? Some funding to help pay for health insurance.
*Note: I should point out that the PPACA is a broad and sweeping act that addresses a broad range of health-related issues. It will expand Medicaid coverage, mandate that big chain restaurants publish the caloric counts of their entrees, mandate that health insurance companies cover the cost of contraceptives and more. It also mandates that states set up a health care exchange to make it easier for people to compare and contrast the features and costs of different plans. I will take this opportunity to jump up on my soapbox and say that everyone (not just people working in startups) deserves good health insurance; but any step forward is a good step.
image credit: aadl.org
Melba Kurman writes and speaks about innovative tech transfer from university research labs to the commercial marketplace. Melba is the president of Triple Helix Innovation, a consulting firm dedicated to improving innovation partnerships between companies and universities.