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May 11, 2010
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.
SHEEO, Higher Education Finance, 2009
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.
Average Annual Student Undergraduate Costs* at Public 4-Year Institutions2 State Ohio California Tennessee United States 2002-03 $ 12,216 $ 10,812 $ 8,298 $9,787 2003-04 $ 13,346 $ 12,288 $ 8,934 $ 10,674 2004-05 $ 15,251 $ 13,354 $ 9,443 $ 11,426 2005-06 $ 16,032 $ 13,685 $ 9,956 $ 12,108 2006-07 $ 16,902 $ 14,348 $ 10,533 $ 12,797 2007-08 $ 16,353 $ 14,892 $ 11,340 $ 13,423 2008-09 $ 16,582 $ 15,683 $ 12,026 $ 14,256
* 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
Digest of Education Statistics, 2009 Elias, Risa. Financing Long-Term Care, Kaiser Commission on Medicaid and the Uninsured, Kaiseredu.org, 2006
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
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 SChip 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 5 6 7 8
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 The College Board, Trends in College Pricing 2009 Wright & Yanagiura. Heading South, SHEF, 2006 Medicaid 101, Kaiser.edu, Kaiser Family Foundation Kane, Thomas J.; Orszag, Peter R.; Apostolov, Emil, 2005, pp. 101
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.
State Appropriations for Higher Education per $1000 of Personal Income 10.00
9.00 State Appropriations for Higher Education per $1000 of Personal Income Dollars
19 89 -9 19 0 91 -9 19 2 93 -9 19 4 95 -9 19 6 97 -9 19 8 99 -0 20 0 01 -0 20 2 03 -0 20 4 05 -0 20 6 07 -0 8
Healthcare and education in the context of state budgets are engaged in competition with
College Board, The Trends in Higher Education Series, 2009 The National Association of State Budget Officers, State Expenditure Report, 2008
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
11 12 13 14
State Health Facts, Kaiser Family Foundation Elias, Risa. Financing Long-Term Care, Kaiser Commission on Medicaid and the Uninsured, Kaiseredu.org, 2006 Ohio Board of Regents, Policymakers Guide, 2004 Ohio Office of Budget and Management, Executive Budget FY 1011, 2009
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
Hovey, Harold. State Spending for Higher Education in the Next Decade, The National Center for Public Policy and Higher Education, 1999
(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.
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