Improving Data to Tackle the Higher Education "Cost Disease": In Seeking Answers to the "Cost Disease", It Is Particularly Important to Identify the Policy Levers That Influence Cost Behaviors

By Wellman, Jane V. | Planning for Higher Education, April-June 2010 | Go to article overview

Improving Data to Tackle the Higher Education "Cost Disease": In Seeking Answers to the "Cost Disease", It Is Particularly Important to Identify the Policy Levers That Influence Cost Behaviors


Wellman, Jane V., Planning for Higher Education


The "Great Recession" of 2008-2010 has brought a truly unprecedented level of financial chaos to U.S. higher education: programs are being reduced, staff and faculty are being furloughed, class sizes are increasing, sections are being cut, and tuitions are rising. Reports of budget cuts in the neighborhood of 15 to 20 percent (in Pennsylvania, Virginia, New York, Florida, and California) are now common. Students are being turned away in droves: in California alone, an estimated 300,000 students will be denied access by institutions that do not have room to admit them. And, unlike in earlier recessions when state revenue cuts primarily affected public institutions, this time even the wealthiest private institutions are being hurt, as Harvard, Stanford, and Yale universities report losses in endowment revenues in the magnitude of 30 percent. True, these institutions are falling from a lofty perch. Still, no institution, rich, poor, large, or small, is entirely immune from the meltdown (National Governors Association and National Association of State Budget Officers 2009).

Also, unlike earlier recessions, the prevailing view is that this time the higher education "cost disease" has reached a point where it is unsustainable, borne of a chronic mismatch between revenues and spending in an environment of growing national need for increased access and degree attainment. In years past, institutions could be reasonably confident that funding shortfalls were cyclical and that good times would return in a year or two. Now, even the most determined optimists believe that the time when higher education could count on routine annual revenue increases of two to three percent above inflation is over. Instead, higher education is faced with discovering ways to manage resources so as to find the best fit between revenues and mission. For all types of institutions, this means tackling the higher education cost disease.

The "cost disease" phrase was coined by economists William Baumol and William Bowen (1966), based on their work on nonprofit cost structures. They conclude that in these "stagnant" industries, cost increases are inevitable because labor costs cannot be reduced without hurting quality. As labor costs increase, total costs increase. Howard Bowen (1980) further theorizes that within higher education the incentive structure always leads to increases in institutional scope and mission through the addition of programs and a gradual drift toward graduate education and research. Therefore, he surmises that as long as revenues are available, costs will inexorably increase. His "revenue theory of costs" is often translated to the axiom that institutions will always raise all the money they can and spend all the money they get. Charles Miller (2006, p. 8A), the chairperson of the 2006 Spellings Commission on the Future of Higher Education, offers another, more caustic, phrasing of the "revenue theory." In his view,

   the system of financing higher education
   is dysfunctional. In addition to the lack of
   transparency regarding pricing, there is a
   lack of the incentives necessary to affect
   institutional behavior so as to reward
   innovation and improvement in productivity.
   Financial systems of higher education
   instead focus on and reward increasing
   revenues--a top line structure with no
   real bottom line.

The key question for analysts and policy makers alike is whether the cost disease is truly incurable and, if it cannot be absolutely cured, whether it can be treated symptomatically to mitigate the root causes of spending increases. In seeking answers, it will be particularly important to identify the policy levers, both within institutions and by states, that could influence cost behaviors, including the types of measures or accountability strategies that might help tackle costs.

Before turning to the issue of cost metrics, it is necessary to first dissect the different dimensions of the cost disease because, like the classic parable of the blind men and the elephant, it is a beast with many different properties. …

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