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How Obama Care Can and Will Change the Startup World

September 25, 2013   |   By Vela Wood

Obamacare. Everyone has an opinion on it…just Google it. Just the mention of the word brings out every type of person imaginable with their crazy opinions on the Act. However, there is a high probability that a majority of the people who comment on it, either in a good way or bad way, have not read the 750 page act. It’s unlikely that most of the politicians who voted for/against it even read it. Regardless of how you personally feel about the topic, the reality is that Obamacare [the Affordable Care Act] is going into effect, and as long as Washington continues to disagree and fight about everything, it likely won’t be repealed or even amended. Like it or not, we have to treat it as if it is here to stay for some time.

What startups and small businesses need to know about the Act:

On October 1, 2013, the health insurance markets created by the Act will open. For most small business—those with 50 or fewer full-time employees—they are not required to offer health insurance coverage to their employees. However, they are required to notify their employees about the Obamacare marketplaces. Basically, the employer will need to notify their employees that the state and federal insurance exchanges are websites on which individuals can shop for health plans. If the notice is not given, the penalty could reach $100 per worker per day. Employees added after October 1st must receive the notice within 14 days of their start date with the company.

For most new startups, the focus is on building the business, raising capital, and making sure they are able to sustain their company, not giving notice about the healthcare marketplaces. And realistically, no one knows how the requirement will be enforced, so many may be able to get away with not giving the notice and never be punished. Regardless of the fine, most startups seek to eventually hire employees, and as long as the company has 50 or fewer employees, the employer doesn’t have to worry about providing health insurance. But, January 1, 2014, the “Individual Mandate” takes effect. This requires that all individuals have a minimum level of health insurance coverage or face fines—fines that can be thousands of dollars and will increase through 2016. This will lead many employees to look to their employer for some guidance on health insurance. Even if the employees are completely focused on the startup, the need for health insurance coverage creeps up when we least expect it.

So what should a startup do about Obamacare?

First, the startup should focus on getting off the ground and making their company successful. The best and cheapest solution for new companies is to comply with the notice requirements and move on to growing the company. But let’s say the startup gets off the ground, hires 12 employees, and then loses some key individuals to companies that offer benefits. What then? Well there may be an incentive to provide health insurance to employees in the form of a tax credit. In 2014, small businesses will be able to claim the small business tax credit. To claim this credit, the company must:

  • Have less than 25 full-time employees
  • Pay its employees an average wage of $50,000 or less
  • Pay 50% or more of the employees’ premiums
  • Secure a plan offered through the exchange

No matter what the startup decides to do, once the company gets started, it will have to deal with the Act in some way.

How entrepreneurs can take advantage of Obamacare:

The real opportunity here is for entrepreneurs to take advantage of the healthcare market, and develop technology for companies that help them manage their healthcare benefits. There is a world of opportunities for techies to create and develop software that changes how healthcare payments are processed, how insurance is sold, and how data is analyzed and sold to health insurance companies.

Americans spend over $2.8 trillion dollars on healthcare, and with more people living longer and healthcare costs going up, that number will increase as times go by. So why hasn’t there been a jump in startups trying to take advantage of this market and create technology that reduces costs for providers or improves the value for patients? Most likely it is the uncertainty that surrounds the Act.  Many politicians in Washington tell their constituents that they will repeal Obamacare or that they are going to make amendments to the Act. But the chance that something revolutionary will happen to the Act is slim, especially since it appears that everyone in Washington is determined to not compromise on anything and remain in gridlock as long as possible.

There are already some startups breaking into this relatively untapped market. For example, Zenefits, a new California startup established because of Obamacare, offers an automated way for companies to research, buy, and manage their health insurance policies. Zenefits stores the company’s insurance data digitally—effectively taking the place of a human broker. The possibilities, and earning potential, are endless in the healthcare markets since the reality is that healthcare isn’t going away anytime soon.

Ashley Aten is an associate attorney at Vela Wood and focuses her practice on startups, small businesses, and real estate. You may contact Ashley directly at aaten@velakeller.com.


Posted in Startups
Vela Wood
Vela Wood is a boutique corporate law firm that focuses our practice on M&A, emerging businesses, and venture transactions. As a one-time startup and now a small business ourselves, we are proud to represent the businesses and ideas that are fueling tomorrow's growth.