Policy Brief:

Healthcare Costs Hurting Higher Education?

May 11, 2010

1
 Healthcare Costs Hurting
Higher Education?
In March, students in California and across the country grabbed headlines
in their protests of impending cuts to higher education funding. The
country is facing the worst economic downturn since the Great Depression;
meaning states are being pressed to address significant budget shortfalls,
which is historically bad news for state allocations to higher education.
What’s more, the recent passage of healthcare legislation has drawn
grumbling from numerous state capitols over how changes to Medicaid will
impact their budgets and further exacerbate Medicaid’s increasing share of
state dollars at the expense of other priorities. The negative trends in state
support for public colleges and universities has left institutions across the
country looking to students and their families to make up the difference
through increases in tuition and fees. This paper suggests that with
Medicaid’s share of state budgets scheduled to grow in coming years,
greater consideration is needed as to how this could impact public
investments in higher education and in turn, the cost of higher education
for American students and their families.

Medicaid & Higher Education

Nationwide, public support (as a percentage) for higher education has been receding in
recent decades, while simultaneously state expenditures going towards Medicaid have been
increasing. State budget adjustments stemming from the recent recession and the changes
to Medicaid eligibility as a consequence of healthcare reform have recently made this
phenomenon more visible, but only underscore an ongoing trend. The cost of healthcare
and higher education are both rising and states are devoting a growing percentage of their
budgets to cover these cost increases – for Medicaid that is.

Conversely, it appears states are increasingly turning to students and their families, in the
form of tuition and fee increases (Table 1)1, to fill the growing gap between state allocations
and the actual cost of running public higher education institutions. Recently, the State
Higher Education Executive Officers Association’s report showed that in 2008, 37.3 percent
of public higher education total educational revenue came from tuition alone. That is up
from 24.5 percent in 1984, meaning states reliance on students and their families to
supplement higher education revenue increased by 52.2 percent since 1984.

1
SHEEO, Higher Education Finance, 2009

2
 Table 1

The increasing reliance of states on students and their families to share in the cost of public
higher education helps explain steady increases in tuition and fees in recent decades. The
2008 Measuring Up report stated that between the years 1982 and 2007, college tuition and
fees increased 439 percent while median family income rose 147 percent (not adjusted for
inflation). In the most recent fiscal years, this trend has continued to increase, especially in
light of the economic downturn. From 2002-2009, the average annual student
undergraduate costs at public 4-year institutions increased by 45.6 percent to nearly
$14,256.
Table 2

Average Annual Student Undergraduate Costs* at Public 4-Year Institutions2

State 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Ohio $ 12,216 $ 13,346 $ 15,251 $ 16,032 $ 16,902 $ 16,353 $ 16,582
California $ 10,812 $ 12,288 $ 13,354 $ 13,685 $ 14,348 $ 14,892 $ 15,683
Tennessee $ 8,298 $ 8,934 $ 9,443 $ 9,956 $ 10,533 $ 11,340 $ 12,026
United $9,787 $ 10,674 $ 11,426 $ 12,108 $ 12,797 $ 13,423 $ 14,256
States

* Costs include tuition, fees, room and board for full-time students at 4-year, public, degree granting institutions

Parents and students are already helping to make up for state’s inability to keep up with
cost increases in higher education, but with Medicaid costs predicted to grow in coming
years, they will likely only be asked to do more. In 2006, Medicaid accounted for nearly half
of all national expenditures on nursing homes.3 Impending demographic pressures with the
aging of the baby boom mean that Medicaid expenditures will grow steadily in the near
2
Digest of Education Statistics, 2009
3
Elias, Risa. Financing Long-Term Care, Kaiser Commission on Medicaid and the Uninsured, Kaiseredu.org, 2006

3
future. The prospect of Medicaid expenditures further pressing state allocations to higher
education raises serious questions regarding the future of public institutions and engenders
anxiety amongst the growing numbers of young Americans entering higher education whom
are already facing an uncertain future.

Examining the relationship between Medicaid spending and state allocations to higher
education is not unexplored territory. A landmark study by Kane, Orszag & Apostolov4
sought to explain the effects of the economic cycle and Medicaid spending on higher
education. They point out the reality that higher education funding has historically been cut
back during economic downturns, with funding levels rebounding amidst recovery. When
state funding is reduced, higher education tuition and fees rise to compensate for lost state
revenue (Table 2) 5. It has been estimated that on average nationally, net tuition revenues
need to increase by 3 percent to offset a 1 percent decrease in state spending.6
Table 2

Annual Percentage Changes in State Tax Appropriations for Higher Education

Per FTE Student in Tuition and Fees at Public Four-Year Institutions (Constant Dollars)

Economic turmoil leads to both growth in Medicaid rolls and decreases in state tax
revenues, which leaves less public money on the whole for other expenditures. According
to the Kaiser Family Foundation, for every one percent increase in the national
unemployment rate, there is a 3-4 percent decline in state revenues and Medicaid and S-
Chip enrollment grows by one million.7

However, Kane et al. contend that the short-term, periodic effects of economic downturns
on higher education spending are now being exacerbated by the long-term implications of
sustained, non-cyclical growth in state Medicaid expenditures. The authors show that in
the 1990’s amidst a period of sustained economic growth, state support for higher
education institutions did not rebound as it had historically done.8 For example, state
appropriations have fallen from an average of roughly $9.74 per $1000 of personal income
4
Kane, Thomas; Orszag, Peter; Apostolov, Emil. “Higher Education Appropriations and Public Universities: Role of Medicaid and the
Business Cycle,” Brookings-Wharton Papers on Urban Affairs, 2005, Issue 6, 99-146
5
The College Board, Trends in College Pricing 2009
6
Wright & Yanagiura. Heading South, SHEF, 2006
7
Medicaid 101, Kaiser.edu, Kaiser Family Foundation
8
Kane, Thomas J.; Orszag, Peter R.; Apostolov, Emil, 2005, pp. 101

4
in 1989 to an average of about $6.50 per $1000 of personal income in 2009. (Table 3)9 To
explain this change, the study suggests that rising Medicaid expenditures (Table 4)10 as a
consequence of programmatic expansions and rising healthcare costs inhibited the
traditional resurgence of state spending on higher education during economic upswings.
Table 3

State Appropriations for Higher Education per $1000 of Personal Income

10.00

9.00

State Appropriations for

Dollars

8.00 Higher Education per $1000

of Personal Income

7.00

6.00
19 0

19 2

19 4

19 6

19 8

20 0

20 2

20 4

20 6

8
-9

-9

-0
-9

-9

-9

-0

-0

-0

-0
93

95

97

07
89

91

99

01

03

05
19

Table 4

Healthcare and education in the context of state budgets are engaged in competition with
9
College Board, The Trends in Higher Education Series, 2009
10
The National Association of State Budget Officers, State Expenditure Report, 2008

5
one another for scarce state resources. In 1970, Medicaid accounted for 3 percent of state
spending, but by 1990 it accounted for 12 percent of state spending. Nationwide in 2008,
Medicaid accounted for 16.3 percent (111.7 billion) of total state budgets, while higher
education came in at 11.3 percent (77.5 billion)11.

Between general healthcare cost inflation and the aging of the baby-boom, this disparity will
grow. Moreover, if history serves as a guide to the effect of Medicaid programmatic
expansions, the recent increased eligibility provided by the new healthcare law could lead
to greater costs to states down the road once federal obligations to cover the expansion
expire.

Advantage Medicaid

Medicaid costs grow during times of economic distress, but there are long-term structural
challenges pulling increasing amounts of public dollars into Medicaid and leaving less money
for states to invest in higher education. Advances in therapies and technology and the
rising cost of prescription drugs drive healthcare costs nationally as well as within the
Medicaid program. However, the impending aging of the baby-boom generation will
introduce further cost increases, given that a third of Medicaid spending is already dedicated
to long-term care. Nursing home care for low SES elderly individuals is the largest single
category of Medicaid spending. 12

Ohio illustrates this trend, in that the state’s funding per nursing home recipient has surged,
while per pupil funding in higher education has taken a nose-dive (Table 5) 13. The
percentage of Ohio’s budget devoted to higher education peaked in 1978 at 17.7 percent
but has fallen each year since 1996, to a scheduled 8.5 percent in the upcoming 2010-2011
budget. Within this same budget, Ohio will designate 45.5% of its total budget to health
expenditures.14
Table 5

11
State Health Facts, Kaiser Family Foundation
12
Elias, Risa. Financing Long-Term Care, Kaiser Commission on Medicaid and the Uninsured, Kaiseredu.org, 2006
13
Ohio Board of Regents, Policymakers Guide, 2004
14
Ohio Office of Budget and Management, Executive Budget FY 1011, 2009

6
Maintaining quality in healthcare as well as in higher education requires funding, but within
cash strapped state capitols, it is advantage Medicaid. There are numerous explanations as
to why, some related to the nature of the Medicaid program and some related to the
nature of higher education itself. One major reason being that the responsibility for funding
Medicaid is shared between the federal and state governments and there are ways that
states have taken advantage of this arrangement, which contributes to recent growth in
Medicaid expenditures. Unlike higher education, Medicaid also has a stricter legal basis,
which embeds expenditures into state budgets, while higher education is left to make its
case as more or less a form of discretionary spending. Additionally, like higher education’s
other principal competitors for state funding, K-12 education and corrections, Medicaid has
comparatively greater political clout. The National Center for Public Policy and Higher
Education points out how cuts in Medicaid impact the private sector and give provider
associations, nursing homes, insurance companies and others adversely affected by
reductions cause for rallying to Medicaid’s defense, similar to the way teacher and prison
guard unions fight for their own interests.15 In his recent remarks on April, 13 2010, Paul E.
Ligenfelter, President of the State higher Education Executive Officers, outlined how:

“State funding has been consumed by very rapid growth in

Medicaid, steady, but perhaps not so rapid growth in K-12, and to
a lesser extent (perhaps) increased spending on corrections –
higher education can’t compete politically with these priorities
and their growth has been funded through reallocation from
higher education.”

However, perhaps the most plausible explanation for state reductions in higher education
has as much to do with higher education’s ability to raise money from alternative sources.
The public has been seemingly accepting of the view that higher education has significant
private benefits for the student and consequently students themselves should shoulder a
larger portion of the cost of their education. Resultantly, loans through the federal
government are increasingly targeted as a key mechanism in keeping higher education
affordable for students and their families and as a consequence, levels of student debt upon
graduation will continue to rise.

Considering Implications

An increasing dependence on private sources and federal loans for the finance of higher
education in the United States raises some challenging considerations for the future. The
first is evident in limitations public institutions face in raising their tuition levels in that they
are public entities and tuition increases are politically sensitive. This means that while
private institutions take advantage of endowments and discriminatory fee structures

15
Hovey, Harold. State Spending for Higher Education in the Next Decade, The National Center for Public Policy and Higher Education,
1999

7
(charging students according to need) to keep pace with the rising cost of operating a
school, public institutions will be less capable of keeping up with rising costs and the
disparity between the per pupil expenditure at private and public institutions will only grow
overtime.

Another potential implication is not entirely unrelated to healthcare and is related as to

how greater debt burdens for young graduates play out in the labor market. One accepted
explanation for the comparatively high cost of healthcare in the United States is the
proliferation of healthcare specialists and the deficit in primary care providers. The
motivation of medical students to specialize is likely associated with the high cost of medical
school for individuals, which has resulted in a shortage of a socially essential profession. A
similar scenario plays out in law schools where students opt for employment in the private
sector at the expense of filling essential, public interest positions. How this labor market
scenario has played out in graduate and professional schools, where public support eroded
long ago, could be intensified as greater debts on the backs of undergraduates lead to future
shortages in other essential fields such as nursing and teaching.

An unsettling reality regarding the implications of greater cost sharing in higher education is
the assumption that underlies the validity of this approach: that graduates are able to obtain
jobs that allow them to effectively manage and pay off their student loan debts in a timely
manner. Today’s college graduates are already facing a difficult and highly competitive job
market. Aside from the recent economic downturn’s effect on jobs, the, “massification,” of
higher education means that there are more skilled individuals than ever on the market
competing for jobs. State funding for public higher education institutions keep individual
debt burdens low and resultantly, can broaden graduates’ options in a job market, where
wages have not risen in commensurate with increases in the cost of higher education.
However, it is not beyond the realm of possibility that if graduates are not able to obtain
jobs that enable them to payback their student loans and prevent default, they themselves
could one day be thankful for the funding of robust Medicaid benefits.