Higher education and health care

This post will point to a striking similarity between higher education and health care - the sky-rocketing prices for services in both markets.

I have already blogged extensively about the steep increase in the price of health care services, which has far outstripped the rate of inflation. The Economist points to an article by Malcom Harris which highlights the spectacular increase in the cost of college education,

"The Project On Student Debt estimates that the average college senior in 2009 graduated with $24,000 in outstanding loans. Last August, student loans surpassed credit cards as the nation’s single largest source of debt, edging ever closer to $1 trillion... Since 1978, the price of tuition at US colleges has increased over 900 percent, 650 points above inflation. To put that number in perspective, housing prices, the bubble that nearly burst the US economy, then the global one, increased only fifty points above the Consumer Price Index during those years."

What are the reasons for the steep increases in prices in both these markets? Apart from the standard reasons, here are some observations

1. The college education premium has increased considerably in recent years. The returns to higher education has grown exponentially, especially with the emergence of the knowledge-based sectors into prominence in the last two decades. It is therefore natural that students and parents volunteer to cough up whatever it takes to accquire higher education degrees.

This premium has also increased between colleges. A degree from an elite college commands a greater premium in the market than that from an ordinary college. It therefore becomes natural for colleges to increase their fees.

2. Technological innovations of the last decade have increased the quality of service delivery in both markets. Not only has the range of services offered expanded, but also their quality. This trend is more pronounced in health care, especially in critical care and interventions which either increase life spans or improve the quality of post-treatment life.

In such cases, the marginal benefit is clearly a longer lease of life. The enormity of the benefit naturally raises the premiums attached to it. The fact that an increasing number of people are willing to pay these huge premiums only amplifies the increase in premiums.

3. There is a behavioural dimension to the increases. In both markets, the recipients of the service does not directly pay for the service received. In health care, the insurance provider covers the cost of the treatment and the patients' exposure is limited to his periodic insurance premium payments. In other words, the cost of each treatment or service is not cognitively salient for its recipient.

Similarly, higher education is mostly financed with student loans. In most cases, the repayment of these loans are back-loaded and starts only after the student enters his high-paying job. This financing patterns ensures that the student is therefore not cognitively exposed to the full cost of his education.

In both cases, the absence of any direct connect of the patient and the student with the full cost of treatment and education respectively, mitigates the impact of increasing prices. The insurer and student loan agency act as cognitive smokescreens for the service recipients.