How Much Is Health Care Worth?

How Much Is Health Care Worth?

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Higher education has a relative value problem.

The product of higher education is widely embraced in the United States: 20 million students attend our 3000 schools of higher learning.

Per the Bureau of Labor Statistics, a college grad can expect to earn 1.7-2.7 times the lifetime income of a student who finished high school and entered the workforce.

A college degree provides higher employment security: in 2012, the unemployment rate for college grads was 4.5% versus 8.3% for those with high school diplomas.

Colleges play a key role in our local communities—for economic development, workforce development and as a major employer.

And a recent Pew Research survey (February, 2014) found 9 of 10 with college degrees believe the investment has or will pay off.

Higher education does not have a value problem: its value proposition against the option of not getting a degree is solid.

But higher education has a relative value problem.

Since 1985, the price of higher education has increased 538% versus medical costs (+286%) and the consumer price index (+121%).

Stated differently, annual tuition increases have been 7.4%–more than healthcare (5.8%) housing (4.3%) and family income (3.8%). Last year, students and families paid $154 billion in tuition and fees to attend college: 60% borrowed $106 billion to help pay their bill.

In the end, 38% enrolled in four-year degree programs and 21% in two-year degree programs will not graduate on time. One in seven with student loan debt will be delinquent on their debt, and student loan indebtedness, now at $1 trillion, will shortcut household discretionary spending that might otherwise be injected in our economy. And incomes for college grads have stagnated for the past 12 years.

The perplexing question facing higher education is this: does a college degree pay? And more precisely, what is relative value of each institution’s offering given alternatives?

Consider…

  • What’s the relative value of online degree programs versus traditional campus based?
  • How important is a tenured faculty system in producing better student outcomes versus adjunct teachers with relevant industry experience?
  • What’s the relative value of competency-based curricula compared to traditional liberal arts pedagogy?
  • What’s the difference in private or public honors programs, or an Ivy League degree versus the local state school option?
  • What’s the relative value of top tier collegiate sports versus an intense focus on classroom proficiency exclusively?
  • And what’s the relative value difference between a degree costing $200,000 for four years versus the same degree for $40,000?

The market is forcing these questions about the relative value of higher education. Disrupters like Western Governors University and others are offering fresh options—a bachelor’s degree in 3.1 years from an accredited university for $19,000 total. And independent websites like Payscale.com, CollegeRiskReport.com, CollegeRealityCheck.com and others are forcing the issue via independent websites that quantify differences in tuition, student achievement on standardized tests, and job placement.

Relative value is a term rooted in investing: it compares the attractiveness of one investment over others in terms of riskliquidity, and return. In healthcare circles, it’s most prominently used to set Medicare reimbursement rates for physicians using the complicated Resource-based Relative Value Scale, and more recently in the Affordable Care Act’s Comparative Effectiveness Research effort wherein treatments will be compared based on efficacy and effectiveness.

Healthcare in the U.S. does not have a value problem. Like higher education, it does not need to demonstrate that our system outperforms others of the world in availing caregivers the latest technologies and life-saving heroics.

We are quite proficient in declaring our value; we are quite challenged to assert and validate our relative value.

And that’s what our market is asking…

  • What’s the value of health insurance? How do alternatives compare?
  • Why do prices for routine procedures and tests vary so widely across communities and regions, and how can what’s paid be compared to alternatives when outcomes and underlying costs are unrelated?
  • Why are there 1400 hospitals among the “Top 100”?
  • Why does each insurance plan’s small print defy side-by-side comparison against others?
  • Why do drugs with the same ingredients in the same amounts have different efficacy and different prices? And how do alternative remedies and over the counter options compare?
  • Why do academic medical centers cost dramatically more than community hospitals for routine treatments with similar results? Or routine preventive health when delivered by nurses or physicians?
  • How do end of life options compare versus expenditures and heroics that rob families and patients of resources and peace of mind?
  • What differentiates between an “essentially equivalent” device that enters a market overnight and a similar that required years to get approval?
  • Why does a nurse practitioner get paid half what a physician gets paid to diagnose a simple, uncomplicated medical problem? And what’s the difference in retail clinics operated by drugstores versus those sponsored by health systems?
  • What’s the relative balance of a high performing system’s high tech, high touch investments in care?
  • What are we getting for $9000 we spend on healthcare for every man, woman and child in the U.S. when outcomes of systems that spend significantly less rival ours?

And many others.

Granted, there are big differences between higher education and health care:

  • Higher education is optional to most consumers; health care use is not optional, though health insurance is. Everyone’s a user of the health system.
  • Higher education uses a B2C operating model: colleges and universities target prospective students and their families. By contrast, health care operates in a B2B world. Consumers play a lesser role in deciding which drugs and devices are used and have nominal influence on prices and the quality of service delivery.
  • Higher education is largely self-governed; health care is more heavily regulated at the state and federal levels.

But the challenges facing the two industries are directly comparable:

  • The demand for “traditional approaches” is declining. From 2010 to 2012: enrollment at 25% of private 4-year college and universities declined 10% of more versus 20% for the period from 2006 to 2009. To replace traditional students, adult programs and non-degree classes have taken their places. In healthcare, demand is shifting from specialty care to intensified primary care, serving a wider range of populations with unique expectations and clinical problems.
  • Margins are shrinking in core businesses: “…nearly half of the nation’s colleges and universities are no longer generating enough tuition revenue to keep pace with inflation, highlighting the acceleration of a downward spiral that began as the recession ended” (Moody’s Investor Service)). Likewise, in many traditional settings– acute hospitals, home care, medical specialties and others—operating surpluses have disappeared replaced by ancillary services and new programs.
  • Information technology is disrupting operating models: 45% of college students do online classwork today (Crux Research). From 2001 to 2011, colleges added more staff for non-classroom support than faculty (+57% increase in admin staffing versus a +37% increase in instructors per the US Department of Education). Ditto health care: electronic medical records with built-in clinical decision support tools for diagnosing and treating medical problems is replacing bedside manner, and e-visits, distance medicine, personalized therapeutics, mobile healthcare, applied analytics and predictive models are here to stay. Informediaries in both industries are powerful equalizers that fuel access to facts and figures about relative value.
  • And price sensitivity is a big issue in each.

I have spent more than $450,000 educating my children in public and private colleges. Two have also completed graduate programs.

It’s an investment in their futures.

But I have frequently pondered the relative value of the investment: could I have spent less and gotten more, perhaps used the difference to fund a learning activity of a different sort altogether—perhaps a six month sabbatical to work with the underserved, or travel to unseen parts of the world to engage with different cultures. In the end, I rationalize the investment worthwhile, but the periodic dissonance can be perplexing.

The relative value of the health care industry, like higher education, is an unfolding story. The industry is attracting new competitors that are unconstrained by the traditional ways we deliver and finance care. They break rules set by incumbents. They don’t worship sacred cows. They’re nimble and focused: they see the relative value issue opportunistically.

The U.S. healthcare industry does not have a value problem; it has a relative value problem. Others see it, perhaps better than we do. It’s a discussion we need. It requires straight talk.

Paul Keckley, PhD is an independent health care industry analyst, policy expert and entrepreneur. Keckley most recently served as Executive Director of the Deloitte Center for Health Solutions and currently serves on the boards of the Ohio State University Medical Center, Healthcare Financial Management Leadership Council, and Lipscomb University College of Pharmacy. He is member of the Health Executive Network and advisor to the Bipartisan Policy Center in Washington DC.  Keckley writes a weekly health reform newsletter, The Keckley Report, where this post originally appeared.

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18 Comments on "How Much Is Health Care Worth?"


Guest
legacyflyer
Feb 18, 2014

Peter1,

I just went to your reference: http://www.fairtest.org/satvalidity.html Thanks for providing that link.

It appears to contradict what I said about the predictive ability of test scores vs. grades.

Nevertheless, I suspect that Fairtest.Org is not completely impartial and therefore I am not entirely convinced by what they say.

Guest
Barry Carol
Feb 18, 2014

In my experience, an MBA from a highly selective school such as those in the Ivy League plus Stanford, MIT, and Northwestern is most useful if you want to get hired by one of the big Wall Street firms, investment banks, or leading management consulting firms. A law degree a selective school is valuable for landing a spot at one of the large corporate law firms. The reason is that many of these firms limit their recruiting, at least for the most part, to these schools and perhaps a handful of others when looking for MBA’s and new law school graduates.

On the other hand, I know that companies like General Electric think many of the MBA graduates of these schools are too arrogant and their near term expectations are too high. So, the company prefers to hire out of the Big Ten and other public universities. Indeed, the three most senior executives of the pension fund subsidiary of a large manufacturing company that I worked for from late 1993 to my retirement graduated from Grove City College and Duquesne Law School, University of Texas and Northern Illinois University, respectively.

In my own case, since I aspired to a career in the investment or money management business from the beginning, I got an MBA from one of the selective programs not because I thought I needed one, at least not right away, but because those with the power to hire me thought that I did. I had to play by their rules whether I wanted to or not.

I was also fortunate enough to go to a selective school for my undergraduate degree as well. At the time I started there, the tuition was four times more than Rutgers but it had a top program for people who wanted a career in finance. I’ve known plenty of people who were very successful on Wall Street who did not go to a name school but many of those came in later after some impressive accomplishments in another field.

I’ve said for decades that if you don’t aspire to a job at in one of these fields where the big name school has value in getting you in the door, you should probably go to one of the big public universities and save big time on tuition. Even if you do want to head for Wall Street or a big corporate law firm, the most economical strategy is probably to go to a public university for your undergraduate degree and then try to go to one of the selective business or law schools. Of course, most people don’t yet know what they want to do long term when they start college.

Guest
Peter1
Feb 18, 2014

Maybe relevant.

CBS nightly news did a story on the validity of SAT and CET testing to determine future success in college. Apparently there is no connection. Huge industry in prepping for the tests. Some colleges don’t use the scores at all.

http://www.fairtest.org/satvalidity.html

If we’re not happy with the inner smartness of degreed employees maybe it’s because the testing system is flawed that gave them their degrees. Smart come in different packages, standardized tests only come in one.

Guest
legacyflyer
Feb 18, 2014

Peter1,

Not surprisingly, I disagree. My limited credentials are that I interview students for admission to my college and I was the Chairman of Recruitment for my large medical group for a number of years.

Colleges (and medical groups) are trying to predict who will be successful at their college (or in their group). Colleges don’t want to be admitting people that don’t graduate. They want to admit people who will bring fame to their schools and of course donate money after graduation. Similarly, medical groups want people who will work out and be an asset to the group.

There are basically a number of predictors for how students will do in college; high school grades, test scores, recommendations and interviews. It is my understanding (although I can’t provide a reference) that the single best predictor of success is test scores!

Obviously all of these predictors have their problems; recommendations from people you don’t know are iffy at best, high school grades – at least at some schools – are more related to behavior than to intellectual ability, interviews are a haphazard small sample of behavior. Test scores depend on test design and are also a small sample of a students behavior.

It is fashionable and fits with our American sense of fairness to downplay test scores. I just think it is wishful thinking more than analysis.

Guest
Barry Carol
Feb 18, 2014

Some people with equal intelligence do much better on tests than others. It means little or nothing. In college, I think academic success depends on a combination of interest in the subject matter, personal discipline, study habits and how well organized you are. I remember one roommate who while reasonably smart, excelled academically because he was incredibly disciplined and had great study habits. I knew another guy who had an IQ that was off the charts but eventually dropped out and attended several other schools before eventually getting his degree years later.

With respect to hiring, I break every job down into three main components which are (1) job content and responsibility, (2) pay and benefits, and (3) personal chemistry, work environment and cultural fit. If the employer is satisfied that the candidate has the skills and ability to do the job or can learn them fairly quickly and there is a meeting of the minds on compensation, it’s the third factor that is most important, I think, in choosing among candidates with comparable qualifications. Once your career is under way, your accomplishments will matter far more than your education credentials when it comes to either promotion within the company or advancement opportunities elsewhere.

Guest
Feb 18, 2014

Thanks for a very interesting and thought provoking article. Value for each field is so hard to quantify although at least with education the cost is a little more transparent.

However, is the consumer really getting their money’s worth in either? I’ve employed a number of MBA’s over the years who couldn’t manage their way out of a paper bag….

Guest
Peter1
Feb 18, 2014

” I’ve employed a number of MBA’s over the years who couldn’t manage their way out of a paper bag….”

Shane, If having a degree assumes more than it would imply for success, how would/did you have changed your selection methods to weed out those with just papers and those with skills as well?

Guest
Feb 18, 2014

I now look at qualifications as a smaller part of a potential employee assessment. It’s probably only 30% of what’s needed and after all it only proves you can study, take tests and had the money to get the higher level education. A degree may open a door but that’s just the start of the journey…. It doesn’t prove aptitude for a position nor the right attitude.

Guest
legacyflyer
Feb 18, 2014

Peter1,

Don’t know, quite probably not.

My point wasn’t that she was or wasn’t discriminated against (she probably was), my point was that she accomplished this with a high school education.

And the point of your comment with respect to the topic we are discussing is?

Guest
Peter1
Feb 18, 2014

“And the point of your comment with respect to the topic we are discussing is?”

“not to affirmative action.”

What point did that play? Successful women now are due to AA?

Guest
legacyflyer
Feb 18, 2014

No because there was no such thing as “sex discrimination” lawsuits, affirmative action, etc.

You can be sure that she was good at what she did – and probably better than the men she was competing with.

Guest
Peter1
Feb 18, 2014

But did she make as much as men in the same position?

Guest
legacyflyer
Feb 18, 2014

And as for the necessity for a college education – and what is learned there – I would match my Great Aunt and her high school diploma with any current graduate in Business or MBA.

She managed to rise to an executive position in a large Business in New York during the Depression. And her success was due to her talent and determination, not to affirmative action.

Guest
Peter1
Feb 18, 2014

“not to affirmative action.”

And because she worked for less?

Guest
legacyflyer
Feb 18, 2014

One way to understand this problem would be to construct an Administrator/Physician ratio for Medicine, and an Administrator/Professor ratio for Higher Education

I suspect that there is a direct (and tight) correlation between cost inflation and the number of Administrators.

Guest
Peter1
Feb 18, 2014

What is the relative value of the sorority friends and connections made attending college? Is that the real advantage?

I do agree with Barry that college is used by HR to reduce applicants not find the best candidate, which quite often has to be trained on the job and does not bring many, if any, related college skills to the position, except maybe an ability to understand and apply concepts and have a good recall memory.

Nursing now is demanding bed side nurses have a minimum of a BSCN, whose only purpose appears to be because degreed nurse managers want to be surrounded by same.

The last PHD nurse manager my wife had was a disaster.

Guest
Barry Carol
Feb 17, 2014

As you point out, higher education and healthcare are the two sectors of the economy where prices increased significantly faster than for other goods and services and the general inflation rate for at least four decades now. Interestingly, they are also two sectors with huge government involvement. In healthcare, the government is a huge payer, price setter (for Medicare and Medicaid) and a regulator. For higher education, government is a big lender and dispenser of Pell grants to lower income students, both of which make it much easier for colleges to rapidly raise their tuition.

In higher education, we at least have price transparency though there is a wide variance in what individual students actually pay at a given school as many get financial aid which may include loans and work-study jobs as well as outright grants and some get merit based scholarships. I often wonder, though, about how much it actually costs to educate and undergraduate. Couldn’t there be a decent career path, if not tenure track, for great teachers who would do a lot more teaching and a lot less obscure research and publishing of articles in academic journals that hardly anyone reads? Also, what do these armies of administrators actually do?

I think many large companies use the college degree as a human resources crutch. I suspect that there are millions of jobs that companies arbitrarily decided require a college degree but lots of reasonably bright non-college educated young people could probably do them perfectly well if given a chance and provided with a modicum of training. Certificates in specific specialties like computer programming may also become more prevalent in the future as acceptable credentials to break into the knowledge based job market.

In healthcare, we desperately need price and quality transparency so both patients and referring primary care doctors can more easily identify the most cost-effective high quality providers in real time and direct more of their business to them. Sensible tort reform would also be helpful as would moving away from the fee for service payment model in favor of bundled payments for surgical procedures and capitation for primary care and disease management.

For hospitals, I would love to see some cost benchmarking studies vs. similar hospitals in other developed countries. Hospital costs in the U.S. appear excessive for no valid reason that I can readily identify. Let’s get rid of facility fees for outpatient care and pay academic medical centers through separate revenue streams to cover their education and research missions.

The bottom line is that both healthcare and higher education in the U.S. are way too expensive and there is a lot that needs fixing in each sector.

Guest
Feb 17, 2014

This is an excellent post.

On the education thing, see chapter three of Malcolm Gladwell’s book “David and Goliath” – 3. “Caroline Sacks: If I’d gone to the University of Maryland, I’d still be in science.”

See in particular “relative deprivation.”