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In the US, medical insurance is tied to the employer in the vast majority of cases. Paying for an employee health plan is beyond the means of many startups. Founders are often willing to take the chance or make the sacrifice to forgo medical insurance for themselves. But when hiring employees, you can run up against competition from larger employers who can afford to offer medical insurance. Some great potential employees have pre-existing conditions or children and need health insurance - you'd like to hire them, but they need this one particular benefit.

Startups need to run lean, and most fringe benefits aren't something you should expect in a lean startup. But medical insurance in the US seems to be a sticking point. I've heard from more than one entrepreneur that this is a hiring problem. Is there a practical solution for this that anyone has found?

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'Lean' does not necessarily mean being cheap. – TimJ♦ Jan 22 '10 at 16:14
I agree 100%, Tim. Let me clarify that I'm not asking this as a founder who doesn't offer health insurance! To the contrary, at the last company I founded we offered a complete medical package, and found this to be a significant help during hiring and was a win-win for us and the employees. – Mark Beadles Jan 22 '10 at 19:00
Come to Canada and start your business! ;-) – Chris W. Rea Jan 22 '10 at 21:54
Hmm. I just check Eric's site and there is more emphasis on cost saving and burn, so I am wrong. And I never really spent much time thinking about his philosophy and though I thought i agreed with him I might have to take exception on this point. I guess you have to pick your priorities (as with all things) – TimJ♦ Jan 24 '10 at 7:55
Yeah, Tim, I think you see my point -- there are a couple different schools of thought about this that I've noted. One is the "pure-lean" mentality that sees health insurance as unnecessary in the early stages, and as a consequence hire employees who don't value that benefit highly. The other is the school of that believes that health insurance is indeed a necessary cost of doing business just like Internet access. I'm interested in learning about practical differences between these two schools. Thanks for your comments. – Mark Beadles Jan 29 '10 at 3:26

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Health insurance premiums can be a back breaker. Pre existing conditions are tough for the startup relying on individual or very small group policies. I don't have a great answer for those.

Early on we put together a pretty compelling package employing (relatively) inexpensive major medical policies and Health Savings Accounts (HSA). The package is cash flow friendly and puts the employee in control of his/her medical expenses (and spending). Employees love that the cash in the HSA account is completely under their control. As part of our bonus system, we make year end contributions to employee HSA accounts based on company profitability.

We use HSA Bank for our HSA accounts. They are fantastic to deal with. Check out their web site for info.

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Keith, I like your HSA answer. That seems quite practical for the employer and flexible for the employee. Thanks also for the link, I will check them out. – Mark Beadles Jan 22 '10 at 17:53
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In 15+ years I've never been able to make a health insurance program that pleases everyone and is affordable to everyone. All you can do is your best and do damage control every year when the rates increase. It is the single biggest negative drain on any small business. You'll never match the "benefits" of a big company when looking at the numbers, but I've found that there are employees that value the opportunitity and culture more than the benefits.

Here's a "temporary" solution. Contract-to-Perm for the first 6-months to a year. Use a local recruiter that burdens all that benefit overhead. Sure, you're paying more by-the-hour for the programmer...but what is the true cost of the distraction of you having to figure all this out and bring it on line in a way that pleases all potential employees? I've seen so much wasted momentum on things like this. If you use the recruiter correctly, they find good people very quickly, with minimal effort on your part and they will deal with all the benefits roadblocks.

With time put in place the most basic plan (an HSA as mentioned above is great) and just find staff that are content with that...so you can get back to work on building the business.

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12+ years in startups with very diverse groups of employees in every one of them and we always figured out how to offer health insurance. We were actually attracting great candidates from big companies with a great benefit package (though lower compensation), since not all large companies have that great of a total package. Providing health insurance is just the responsible and right thing to do. BTW, every single one of those startups was self-funded and would be described as lean.

Couple of lessons I've learned:

  1. If funds are very tight, work with the employees to put together a plan that would work. Let them help you get to the level where they can get a nicer package.
  2. When recruiting, health insurance is just one piece of the puzzle. Goal should be to create a corporate culture, environment, work itself, compensation, and benefits to fit into a hard to resist package.
  3. People 1st, customers 2nd, and profits 3rd. Interesting thing is that profitability becomes less of an issue, when your employees can't wait to get to work every day to take care of the customers. Word "collections" disappears too.
  4. There is a HUGE difference between cheap and frugal. Be cheap with your people or customers and you will pay for that dearly (seen personally 2 companies go under that way).
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Apollo, this is in my opinion exactly the correct attitude. I've seen companies try to save money on the wrong things, which ends up backfiring in the end. Once a startup gets past the 2 - 3 founder stage and starts hiring employees, then these issues matter and it's time as you say to create a great corporate culture. Thanks very much for your answer. – Mark Beadles Jan 23 '10 at 20:45

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