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Have you ever wondered why tuition and medical costs keep going up far more than other costs? Here is the research I made on the inflation in tuition, medical services compared with other items in the data from Bureau of Labor Statistics. In this article we will analyze the issue, the causes and give the performance of related indices.

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I see an enormous trend for the last 30 years where education and medical services have an extremely high slope, even more than energy, food and other items. Why is that so? Technology, innovation and productivity increases affect education and medical care more than anything else, and we should expect the sector inflation be lower than general inflation. However, it has not the case for the last 3 decades.

I think fundamentally both education and medicine are broken as the last 30 years didn’t see a substantial increase in lifespan (the slowest increase in the century), nor a substantial increase in education rates that will merit this hyperinflation. The American Enterprise Institute has made a study on the increasing share of education in GDP while graduation goes down.

Health Care:

Here is the content from Kaiser EDU.org that explains more on the causes of higher health care costs:

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Chart courtesy of Kaiseredu.org

What is driving health care costs?

Controlling health care expenditures requires a solid understanding of the factors that are driving the growth in spending.  Some of the major factors to consider are:

  1. Intensity of services – The nature of health care in the U.S. has changed dramatically over the past century with longer life spans and greater prevalence of chronic illnesses. This has placed tremendous demands on the health care system, particularly an increased need for treatment of ongoing illnesses and long-term care services such as nursing homes.
  2. Prescription drugs and technology – Spending on prescription drugs and the major advancements in health care technology have been cited as major contributors to the increase in overall health spending. After six consecutive years of slowing growth, prescription drug spending growth accelerated in 2006, due in large part to the implementation of the Medicare Part D benefit. The effect of spending on technology, such as devices, is harder to estimate.  Some analysts state that the availability of more expensive, state-of-the-art drugs and technological services fuels health care spending not only because the development costs of these products must be recouped by industry but also because they generate consumer demand for more intense, costly services even if they are not necessarily cost-effective.
  3. Aging of the population – Health expenses rise with age and as the baby boomers are now in their middle years, some say that caring for this growing population has raised costs. This trend will continue as the baby boomers will begin qualifying for Medicare in 2011 and many of the costs are shifted to the public sector.
  4. Administrative costs - 7% of health care expenditures are for administrative costs (e.g. marketing, billing) and this portion is much lower in the Medicare program (<2%), which is operated by the federal government. Some argue that the mixed public-private system creates overhead costs that are fueling health care spending. “

Unsurprisingly the Healthcare Diagnostics Index (HHD) has been one of the best performing sector ETFs. The blue is HHD and red curve is S&P 500.

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And as mentioned by Mike Avrilla, Healthcare indices have been beating the market substantially. Here is the research from him. As seen here, most ETFs in this field had beaten the market.

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Education:

Though we don’t have ways to find out the performance of Yale, Harvard and other universities, I have used publicly traded educational companies as a proxy, and their returns are obscenely high. Here is the return for last 10 years. The red one is the S&P 500 and other three are education services companies – Apollo Group (NASDAQ:APOL), Career Education Corp. (NASDAQ:CECO) & ITT Educational Services (NYSE:ESI).

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As seen in the chart below the biggest increase in prices seems to be from private institutions rather than the public ones.

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While institutions are steadily increasing tuition, salaries for the faculty are not keeping up with the increase in tuition:

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Images Courtesy of: http://nces.ed.gov/pubs/96769.pdf