Exploring the Exploding Costs of Education and Medical Services

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.

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:

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.

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.

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 (APOL), Career Education Corp. (CECO) & ITT Educational Services (ESI).

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

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

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

Comments

[pwarren:]

Regarding healthcare costs, a major factor was not mentioned. The cost of malpractice insurance and the cost of deteriing litigation. All aspects of medical practice are influenced by the effect of lawsuit avoidance, Just ask any doctor or any hospital administrator. The application of technology and the use of drugs contains a major lawsuit avoidance factor. It is probably impossible to estimate these costs, but I would bet that healthcare costs today would be half the ongoing expense without all of the legal barriers to the delivery of effective healthcare. Think asbestos!

2008 Nov 09 04:31 PM

[captainjohann:]

A great point warren. Unfortunately the drug MNCs are trying to replicate same in third wotrld countires like India by bribinng the thirld world rulers and healthcare officials who long for a visit to USA . The WHO is another institution which has served the drug MNCs well. Its headquaeters should be shifted to Africa or bangladesh.


On Nov 09 04:31 PM pwarren wrote:

> Regarding healthcare costs, a major factor was not mentioned. The
> cost of malpractice insurance and the cost of deteriing litigation.
> All aspects of medical practice are influenced by the effect of lawsuit
> avoidance, Just ask any doctor or any hospital administrator. The
> application of technology and the use of drugs contains a major lawsuit
> avoidance factor. It is probably impossible to estimate these costs,
> but I would bet that healthcare costs today would be half the ongoing
> expense without all of the legal barriers to the delivery of effective
> healthcare. Think asbestos!

2008 Nov 10 12:23 AM

[Mowog:]

Gracious! If the average professor earned $60K in 1992, what is it now? Considering the number of fluff faculty and course, some serious staffing trimming looks overdue. I've heard one problem in academe is that professors aren't retiring; they prefer to hang on as professors emeritus earning fat salaries and teaching few classes. Ending tenure would help bring college costs down, which is what is happening in Japan, where the number of incoming students is dropping (and will continue to do so for years).

2008 Nov 10 06:56 AM

[Crank Monkey:]

Most professors are pretty unproductive. I read about a case where one professors was on staff at 3 different colleges with full time duties and had no trouble meeting expectations.

2008 Nov 10 10:47 AM

[Balaji Visw...:]

The professor's salary is still less than a wall street banker, a doctor or a mid level manager in a technical firm. We have to understand that a Professor has to undergo 10+ years of education, then slog hard for 5+ years as an untenured Assistant Professor, before earning that much. If the Professors earn too low, then you won't have qualified people applying for faculty positions and that will pull down the quality of the entire education system.


On Nov 10 06:56 AM Mowog wrote:

> Gracious! If the average professor earned $60K in 1992, what is it
> now? Considering the number of fluff faculty and course, some serious
> staffing trimming looks overdue. I've heard one problem in academe
> is that professors aren't retiring; they prefer to hang on as professors
> emeritus earning fat salaries and teaching few classes. Ending tenure
> would help bring college costs down, which is what is happening in
> Japan, where the number of incoming students is dropping (and will
> continue to do so for years).

2008 Nov 10 01:32 PM