What Does Health Care Reform Mean for Startups and VCs?

cgseo — Mon, 22 Mar 2010 20:00:00 +0000

In the waning moments of Sunday evening (quite literally the eleventh hour), the U.S. House of Representatives passed was some are calling the most comprehensive changes to the American health care system in over 100 years. The bill passed by a narrow margin of just seven votes, and could be signed into law as early as Tuesday after the Senate passes a small amendment known as the "fix-it bill," though many changes won't be seen for several years. For entrepreneurs, startups and venture capitalists, the legislation ushers in an entirely new set of circumstances and opportunities. Sponsor By 2014, the bill requires states to set up what are known as "SHOP Exchanges," or Small Business Health Options Programs, which allows SMBs to group together when buying health insurance. "Small businesses" are defined as having fewer than 100 employees, but individual states can choose to only allow businesses with no more than 50 employees to participate for the first two years. Companies with 25 or fewer employees could potentially be eligible to receive a 35% tax credit for buying health insurance as early as this year. By 2014, those companies could see that credit rise to 50%, while even smaller companies could receive a full tax credit to provide insurance for their employees granted their average salaries are below $25,000 annually. My guess is that a majority of startups (especially smaller, younger startups strapped for cash) would fall somewhere under these tax break brackets, which could entice them to provide coverage. Having the ability to affordably provide health insurance to employees is a tool that could prove useful in attracting and maintaining a talented team at a smaller level. For companies with fewer than 50 employees, there will be no penalties for not providing insurance, but for larger companies, steep fines could be levied should they fail to purchase insurance. Some fear that this could halt companies from growing past 50 employees should they choose to not want to provide insurance, but others argue that only a small amount of the nation's small businesses would be affected. Another fear is that in the time between now and 2014, health insurance companies will drastically raise rates in an effort to shore-up as much cash as they can before the new rules kick in. Five months ago, San Francisco-based company TriNet surveyed small business executives and found that for over 75% of respondents, as much as 10% of their companies' revenues were being spent on health care. Furthermore, 63% said their rates went up by as much as 20% over the last year, so the possibility of further insurance rate hikes is unfortunately a continuing trend. So will smaller companies jump on board with health insurance or will those already participating be forced to jump off with increased rates? For their sake, I hope they have fewer than 50 employees or they could be fined as much as $2,000 per employee for not providing insurance. Representative Joe Donnelly of Indiana tried to reassure small business owners Monday morning: "I would not have supported this bill if I didn't think that it was a benefit to small business and to mid-sized business, [and] made our companies more competitive in international markets," he said. While business owners argue the possible benefits and detriments of the new bill, venture capitalists are already looking for ways to take advantage of the changes. Dr. Bijan Salehizadeh, an investor with Highland Capital Partners , wrote recently about how he is keeping his eye out for startups that can streamline and improve on the health care industry , especially those focused on chronic disease management, practice profitability tools, and CRM for practices. "Why is it that every other category of small business in the country has figured out CRM other than physician practices? I'm talking about electronic scheduling, reminders for visits, etc. Really basic convenience oriented items that make a huge difference to patients/consumers," writes Salehizadeh. "If restaurants can do it, then doctors offices must be able to do it in 2010." One such startup looking to help small businesses deal with the shifting seas of health insurance premiums is Bloom Health . In a nutshell, Bloom allows companies to pay them a fixed rate and then Bloom offers the employees the choice of any insurance plan on the market. In other words, it lets small businesses outsource their health insurance for the security of fixed premiums. More VC firms will likely be putting money behind companies like Bloom, such as Chrysalis Ventures , whose managing director David Jones predicted this practice last July. "Whatever form health care reform takes, we believe companies that can improve the productivity and efficiency of improvement of health care services and avoidance of medical problems are going to prosper, and we're putting our money behind that belief," said Jones in an interview with the New York Times last summer. So now that the health care reform bill has passed, and sweeping changes are coming to America's businesses, what do you think? Will the benefits outweigh the costs and help smaller businesses provide for their employees? Or will larger companies pay the price for not providing insurance lest they be forced into paying for coverage? This is a truly complicated issue, and it is unclear which way things will go, so let us know what you think of it all in the comments below. Discuss