Economic View: For Obamacare to Work, Everyone Must Be In

These may seem to be reasonable positions. But they are incompatible. That’s been shown by historical events, and it’s now being strikingly confirmed by recent experience in the emerging Obamacare insurance exchanges.

The crux of the matter is what economists call the adverse-selection problem. Uninsured people with pre-existing conditions often face tens or even hundreds of thousands of dollars in out-of-pocket medical costs annually. If insurers charged everyone the same rate, buying coverage would be far more attractive financially for people with chronic illnesses than for healthy people. And as healthy policyholders began dropping out of the insured pool, it would become increasingly composed of sick people, forcing insurers to raise their rates.

But higher rates make insurance even less attractive for healthy people, causing even more of them to drop out. Before long, coverage would become too expensive for almost everyone.

The adverse-selection problem explains why almost no countries leave health care provision to unregulated private insurance markets. It also predicts that requiring private insurance companies to charge the same rates to everyone will make it prohibitively expensive for most people to buy individual health insurance.

In the 1990s, lawmakers in New York State enacted just such a requirement, and the result was exactly as predicted. Rates for individual policies soared, making New Yorkers’ insurance among the most expensive in the nation. Now, rates quoted under the Obamacare exchanges place individual policies within reach for millions of New Yorkers. New York City residents who had been paying $1,000 a month for individual policies in the earlier environment, for example, will now be able to purchase similar coverage on the Obamacare exchanges for slightly more than $300 a month.

What’s changed? Insurers are able to offer more reasonable rates because the individual mandate — the requirement in Obamacare that everyone buy insurance or face financial penalties — is ensuring a high proportion of healthy people in the insured pool.

Early quotes for individual policies on the exchanges in several other states have exhibited a similar pattern. That’s true in California, for example, and in Maryland, the latest state to report, rates now compare favorably with those in employer group plans.

Despite this experience, many in Congress want to repeal the individual mandate. Some, such as Senator Marco Rubio of Florida, have even threatened to shut down the government unless Obamacare is repealed entirely.

What alternatives are there? One way of avoiding the adverse-selection problem would be to re-emphasize traditional employer-provided health plans. Adverse selection is less serious under such plans, because the favorable tax treatment they receive requires insurers to cover all employees irrespective of pre-existing conditions. (Insurers can meet the requirement because most people employed in any company are reasonably healthy.)

But Obamacare was enacted precisely because employer plans fell short in many other ways. Millions of people, for example, are ineligible for such plans because they don’t have jobs. And millions of others with chronic health problems are trapped in their current jobs, because leaving them would mean losing coverage.

Employer plans arose in the first place only because of a loophole created by wage controls during World War II. In an effort to curb the costs of the war effort, the government prohibited wage increases but, perhaps by oversight, did not prevent employers from offering additional fringe benefits as a way to combat labor shortages. Employer health plans proved an especially effective recruiting tool and had the additional advantage of not being taxed as implicit income.

BUT if universal access to health care is the goal, employer plans are not the solution. Because global competition has increased pressure to cut costs, the number of workers with such plans has been steadily declining for more than 40 years.

The challenge was to design a new system that could cover the more than 50 million Americans without health insurance. The Medicare-for-all proposal favored by many health economists was one approach that the administration considered.

But that approach would have required Americans to abandon their existing employer plans for something new and unfamiliar. In the light of survey evidence that most Americans were reasonably satisfied with their existing plans, it’s hard to second-guess President Obama’s conclusion that this step would have been politically infeasible.

The only remaining option was to supplement existing employer plans with regulated private insurance markets. This approach had been carried out successfully in Switzerland, and in Massachusetts under Mitt Romney when he was governor. Individual mandates were an essential ingredient of that strategy. And given that many people could not afford to purchase insurance, it was also necessary to include subsidies for low-income buyers.

Obamacare, in any event, is now the law of the land. Even its most ardent supporters concede that the program will need to be amended as experience accumulates. But evidence from the emerging insurance exchanges vindicates the basic policy choices underlying the legislation.

We must ask those who would repeal Obamacare how they propose to solve the adverse-selection problem. That problem is not an abstraction invented by economists to justify trampling individual liberties. As experience in most countries around the world has confirmed, it is a profound source of market failure that renders unregulated insurance markets a catastrophically ineffective way of providing access to health care.

Robert H. Frank is an economics professor at the Samuel Curtis Johnson Graduate School of Management at Cornell University.

Bits Blog: Supercomputing for Everyone

With the aid of the Chinese military, Intel has won itself big bragging rights: the world’s fastest supercomputer runs entirely on Intel semiconductors. It is the first time in 15 years, Intel says, that an all-Intel machine has held top honors.

More important is what this news says about computing: the kind of work done by supercomputers is increasingly applicable to the kind of work done by business. Intel doesn’t want to sell its biggest computers to researchers and the world’s armies; it wants to sell them to companies like Amazon for its Amazon Web Services.

The new computer, called a Tianhe-2, or Milkyway-2, was built at the National University of Defense Technology in Changsha, China. At its peak, it can perform at a speed of nearly 55 petaflops – with a petaflop akin to one thousand trillion instructions per second. The previous record-holder, announced last November, had a peak performance of 27.1 petaflops. Five years ago, a single petaflop machine was record-breaking.

In addition to the usual supercomputing tasks like weather analysis or geophysical research, makers of the new supercomputer also listed its capabilities for Big Data analysis. The Tianhe-2 can process 600 terabytes of data on just 1,024 of its 16,000 computing nodes.

Details on the machine were first revealed at a meeting of supercomputing specialists in late May. Its formal ranking as the world’s fastest was announced Monday at a meeting in Germany, where Intel also laid out its business vision.

Intel believes that many ordinary businesses, possibly even consumers, will soon be accessing what were once the most expensive and rarefied computers.

“The insatiable need for computing is driving this” rapid development, said Raj Hazra, the head of Intel’s high performance computing business.

Even traditional uses appear to be affected by both the power of the machines, and a new sensibility of the way problems should be addressed. Mr. Hazra noted that this much power enables atmospheric climate models to also take into account the effect of ocean behavior as well. Geologists can examine not just rock formations, but the behavior of gasses and liquids within different rocks.

This ecosystem view of data analysis has its own parallels in the commercial world. Increasingly, companies are deploying sensors across many environments to see how their products perform in the real world, or looking at mixtures of human and machine behavior to analyze things like traffic flow.

Google and NASA recently obtained a kind of superfast quantum computer to look at things like facial recognition. Lockheed Martin has also purchased one to examine complex systems.

Intel is hoping that its familiarity has an edge in this arcane world, however. Many computer engineers are already trained in Intel’s basic architecture, x86, and so could arguably move into supercomputing without having to learn the particulars of other machines. “If you force people to learn new things, your total addressable market is slowed,” Mr. Hazra said. “A world that has invested 30 years of software and knowledge shouldn’t have to learn something new.”

“We have a close relationship with all the cloud computing providers,” he said, “you could see high performance computing as a service.”

Mr. Hazra said the computer was being used for “open science,” or access by different researchers over a network. He could not say, however, whether China was also using the computer for defense purposes such as nuclear weapons research. “We are a worldwide business,” he said. “This was no different than any other business deal.”

The x86 supercomputing world is, of course, a convenient argument for Intel. It is likely that Nvidia, which contributed to last November’s record-holding supercomputer, will make its own run at the next title, however. Even more likely, according to the author of the initial report on the Tianhe-2, is the prospect that China will develop its own chips and designs.

“The Tianhe-2 is using processors from Intel, but think of the processor as a motor and they are building a racecar. They can easily swap out the motor for one of their own,” Jack Dongarra, a professor at the University of Tennessee and Oak Ridge National Lab, another supercomputing center, said in an e-mail. “Most features of the system were developed in China.”

“Intel would think the world is x86,” he said, but “the parts that go around the motor are more important.” In addition, he noted, engineers elsewhere are working on supercomputers using designs from low-power cellphone chips.

Corner Office: Jen Guzman of Stella & Chewy’s, on Keeping Everyone in Sync

Q. What were some important lessons for you growing up?

A. I learned one running cross-country, and part of it came from knowing my weakness, which was just pure speed. I did much better on hilly courses than flat courses, so I developed a strategy. I would stay with the pack for a lot of the race, and then, when it came to the hilly portion, I knew that’s when people tended to give up a little bit because it was the toughest part of the race.

So I would actually sprint up the hill, particularly that last 30 percent, when there was that natural reaction to just let go. And then, once I was over the hill and out of sight, I would sprint down the hill. So when someone came up over the hill behind me, they would see that I had opened up more of a lead.

Q. Does that strategy translate into other parts of life?

A. When I’m hiring someone, I think, “I want someone who’s going to sprint up the hills.” When the course gets really tough, that’s when you want someone who’s going to really rise to the challenge.

Q. Let’s talk more about hiring. What else are you looking for?

A. I try to hire the best person for what the organization needs, and who can fit into the culture, rather than just hiring the person with the strongest résumé. And there’s another sports analogy I think back on. When I was a sophomore at Harvard, and I was rowing, the coach had a system for picking what was called the “first boat.” She would line up two boats. In one would be the eight strongest rowers. In the other boat would be the ones she thought were the next eight strongest rowers.

She would race the boats, then switch two rowers at a time, race the boats again and then see what happened. She would keep doing that until she felt she had the fastest boat because everyone was in sync. And so that’s how I think about hiring, because often the eight strongest individuals don’t necessarily make the strongest team.

Q. If you could interview somebody for only five minutes and ask just three questions, what would they be?

A. Why do you want this job? Why do you think you would be good at this job? And what do you think are the five most important qualities or things that you need to be good at this job?

Q. Other broader leadership lessons?

A. In my first year at Harvard Business School, we did this exercise early on. We were thrown into groups of roughly 10 people, and we were told that we were stranded in Antarctica or something. The plane had crashed. And there were all these tools on the plane, but you could take only five of them with you. Which five would you take? And we had about 10 minutes to figure it out.

Then the experts came in and told us what we really should have chosen. The whole class was really about what happened in our group, and what were the dynamics. The key thing I learned is that you can’t let the conversation be dominated by one or two voices, which is sort of what happened in our group. The key take-away for me was that to get to the best answer, you need to seek out and pull ideas out of people. And that’s what a good leader should do.

Q. What about mentors you’ve had over the years?

A. One boss of mine really pushed people beyond their comfort zones. When people would go to him with problems, he often would not be quick to give the solution. But he would ask a lot of questions that would make that person advance their thinking, and he would say, “Well, what do you suggest?” That is something I try to do now, because by pushing people out of their comfort zones, they’re going to grow. And as a manager and as the C.E.O., you might be surprised because they might have a better solution than you were thinking of.

Q. Anything unusual about how you run meetings?

A. The typical meeting is about four people — the people who are really going to be actively participating and giving ideas, versus a much broader group. I find that for a small company that needs to be very nimble, that’s a good way to operate.

But there are other meetings where it’s more of a brainstorming session, where it can be a very large group. During one recent one, we probably had about 12 to 15 people. Basically I communicated, at a very high level, what we were trying to achieve, and not much else, because I didn’t want to sort of feed them the ideas. I wanted to hear what they had to say.

In that situation, we broke down into four different groups, with about three to four people each, and had them go into different rooms to come up with their own ideas. Then we regrouped, and had every group present, and took the best ideas from each group.

I think it’s very difficult — it can almost be unmanageable — to have a brainstorming session with 15 people and get complete ideas. This way, you’re getting everyone’s input, because by breaking them into smaller groups, you have several meaningful discussions happening. Then when everyone regroups, you have yet another meaningful discussion about the best of everything. I like to be able to follow thoughts through. When you have a large group, and you just sort of put them all on the spot, you get bursts of ideas, but you don’t get as much thought.

Q. You worked in private equity for a time. What did you notice as you were assessing C.E.O.’s?

A. I looked for people who could explain their business and how they were going to succeed in simple terms, as in: “This is my business model. This is why it works. This is what I think we’re going to achieve next year, and this is how we’re going to do it.” Someone who can boil it down to something very simple, to me, really has their arms around their business. If it’s too complex, how are their employees going to follow it?

Instagram Reversal Doesn’t Appease Everyone

Ryan Cox, a 29-year-old management consultant at ExactTarget, an Indianapolis-based interactive marketing software company, said he had already moved his photos to Flickr, Yahoo’s photo-sharing app, where he could have better control.

Mr. Cox said the uproar this week over whether Instagram owned its users’ photos was “a wake-up call.”

“It’s my fault,” he continued. “I’m smart enough to know what Instagram had and what they could do — especially the minute Facebook acquired them — but I was a victim of naïve optimism.”

“Naïve optimism” is as good a term as any for the emotion that people feel as they put their private lives onto social networks.

Companies like Google, Twitter, Yelp and Facebook offer themselves as free services for users to store and share their most intimate pictures, secrets, messages and memories. But to flourish over the long term, they need to seek new ways to market the personal data they accumulate. They must constantly push the envelope, hoping users either do not notice or do not care.

So they sell ads against the content of an e-mail, as Google does, or transform a user’s likes into commercial endorsements, as Facebook does, or sell photographs of your adorable 3-year-old, which is what Instagram was accused of planning this week.

“The reality is that companies have always had to make money,” said Miriam H. Wugmeister, chair of Morrison Foerster’s privacy and data security group.

Even as Instagram was pulling back on its changed terms of service on Thursday night, it made clear it was only regrouping. After all, Facebook, as a publicly held corporation, must answer to Wall Street’s quarterly expectations.

“We are going to take the time to complete our plans, and then come back to our users and explain how we would like for our advertising business to work,” Kevin Systrom, Instagram’s youthful co-founder, wrote on the company’s blog.

Instagram’s actions angered many users who were already incensed over the company’s decision earlier this month to cut off its integration with Twitter, a Facebook rival, making it harder for its users to share their Instagram photos on Twitter.

Users were apprehensive that the new terms of service meant that data on their favorite things would be shared with Facebook and its advertisers. Users also worried that their photos would become advertising.

Instagram is barely two years old but has 100 million users. Last spring, Facebook announced plans to buy it in a deal that was initially valued at $1 billion. The deal was closed in September for a somewhat smaller amount.

For some users, Mr. Systrom’s apology and declaration that “Instagram has no intention of selling your photos, and we never did” was sufficient.

National Geographic, which suspended its account in the middle of the uproar, held a conference call with members of Facebook’s legal and policy teams. Afterward, the magazine, which has 658,000 Instagram followers, said it would resurrect its account.

Also mollified was Noah Kalina, who took wedding photographs earlier this year for Mark Zuckerberg, the founder of Facebook. In a widely circulated post on Twitter, Mr. Kalina said the new terms of service were “a contract no professional or nonprofessional should ever sign.” His advice: “Walk away.”

On Friday, the photographer said he had walked back. “It’s nice to know they listened.”

Kim Kardashian, the most followed person on Instagram, said on Tuesday that she “really loved” the service — note the past tense — and that the new rules were not “fair.” She had yet to update her 17 million Twitter followers on Friday, but since she is pushing her True Reflection fragrance it is a safe bet that she has forgiven and forgotten.