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Market Imperfections Across Stop & Shop, Brown University, and the Hospital

The American economy is unique for many reasons – most notably, its failure to regulate education and healthcare. In both sectors, this has led to per capita spending that is far too high, and results that are significantly lower than those of our Organisation for Economic Co-operation and Development (OECD) peers. Closer inspection will reveal that the education and healthcare provision markets share a few very peculiar properties that differentiate them from normal goods. Congress has proven itself incapable of responding to these market imperfections. These two systems have been left to operate in a semi-private metaverse of information, and with it have come bloated bureaucracies that just raise prices even further.

This article will reveal the stark set of affinities between education and healthcare, their vulnerability to bureaucratic bloat, why this is a problem, and some possible solutions.

Principles of Economics: Market Imperfections in Education and Healthcare

Neither healthcare nor college are your average type of good or service. They both differ in four ways from, say, buying an apple. 

(1) Accountability: Serious surgery and undergraduate education are very rare services you may receive only once in your life. Therefore, firms (universities/hospitals) are not constantly evaluated based on performance and rehired or fired the next time this service is needed. This limits accountability in service provision because consumers don’t have the power of future demand to keep firms in check. 

(2) Valuation: Given the incredible complexity of both services, it is very difficult for clients (students/patients) to determine their willingness to pay because they don’t know how much utility it will give them. The seller knows far more about the service, but has little incentive to tell the buyer if they’re getting a bad deal. In fact, the seller is often incentivized to do the exact opposite. For instance, many doctors in the US get payouts for prescribing certain pills.

(3) Price Transparency: Poor adoption of the net price calculator and purposely vague extra expense information make the true price tag of college rather ambiguous. Prices in the healthcare industry are similarly opaque, owing largely to confusing coverage plans and hospitals’ frequent refusal to disclose the exact cost of services to patients.

(4) Third Party Payer: The majority of college students are paying their tuition bill using some combination of grants and/or loans and medical patients typically pay for services using some degree of insurance. This separation between the decision-maker (the student/patient) and the payer is a breeding ground for extortion. When the supplier overcharges for their service, the cost is initially covered by a third party. In the long run, however, it is consumers who suffer. They end up with thousands of dollars in debt, ridiculous insurance premiums, or a surprise bill under the door that tells them a reassessment of the situation has revealed that this particular life-saving surgery wasn’t covered at all.

Is this markedly different from other markets for goods and services? Yes! When you buy an apple from Stop & Shop, you know (1) what it’s going to taste like, because you’ve had many apples from Stop & Shop before, (2) what it’s worth, because you know how the apple tastes and therefore how much utility that is going to give you, (3) what the price is, because it says so on the sticker, and finally, (4) you’re pretty unlikely to take out an interest-compounding loan in order to buy it. These factors make the apple market pretty functional, not to mention that the stakes are rather low. Tertiary education and healthcare on the other hand, are possibly the most important economic decisions you’ll make in your life. 

At the end of the day it all comes down to asymmetric information, i.e. discrepancies between what the buyer and seller know about the value or nature of a service. Figuring out who benefits from information asymmetry in an underregulated market is pretty simple: figure out who knows more.

An Implication of these Imperfections: Bureaucratic Bloat

When a lack of accountability, puzzling valuation, arcane pricing, and unreliable third-party payers combine, the relationship between real price and real quality begins to drop. That is exactly what has happened across both the education and healthcare industries. One development of particular note has been the exponential expansion of bureaucracy.

Here, we’re going to focus on bureaucracies in the collegiate setting, not because the same problem hasn’t ballooned in the healthcare industry, but rather because explaining the latter is far more difficult.

The United States is one of only two countries in the OECD that spends more on nonteaching staff than on teachers. These people hold grand titles such as Community Standards Director, Student Conduct Dean, Diversity Coordinator, or Assistant Associate Awareness Administrator. Take Brown University for example, where the price of undergraduate tuition and costs over four years totals approximately $320,000. The average dean or assistant director’s salary often eclipses $100,000 – not to mention the executive board salaries. Certainly, some of these bureaucrats are of incredible utility to the students, helping them to get jobs or supporting students in need. But how could we possibly know which ones are bad at their jobs, or which jobs don’t serve any utility? Where is the feedback mechanism in this business model?

A non-revenue-producing bureaucracy has a single incentive: to maximize its budget. A higher budget means more jobs, and higher pay. The principal-agent problem in most private firms is resolved by profits and contracts. The drive for higher profits means that any expansion of an internal bureaucracy must be in pursuit of greater output or efficiency – to increase profits. In the collegiate setting, however, consumers cannot voice their dissatisfaction with services. It is not as if they can simply leave after one semester and find another service. The costs associated are far too high for efficient selection; a student would have to perform detailed research on other colleges, apply to these other colleges, ensure that course credits can be transferred, relocate, and remove themselves from their whole community.

As a result of this disconnect, the bureaucracies within American universities have ballooned. And we are the ones paying for it. 

A Few Solutions

(1) Federal Tuition Estimator: Create a federal program that aggregates all tuition quotes from actual college admissions letters that students across the country receive every year. The Expected Family Contribution (EFC) calculation that all students already have to complete when filing their Free Application for Federal Student Aid (FAFSA) could be used in conjunction with the financial aid packages actually offered by the colleges they’re admitted into to build an information database of how much colleges actually cost. This would allow students to go online, type in their EFC, and get an accurate estimate of how much a given school would subsidize their studies. Information is power, and by not sharing our information as consumers, we cede this power to private institutions. Currently, the vast majority of high-achieving, low-income students don’t apply to the most selective colleges because they assume they can’t afford it. Instead they pay more for less selective schools. A more streamlined system could change everything.

(2) National Ranking System: Mandate a national board to assess the efficacy of university education across the country. Currently, college rankings are almost entirely driven by factors that don’t reflect the service students are being offered, such as name recognition, prestige, and wealth. Rankings can also rely on alumni’s post-college salaries, which has far more to do with their specific degree or parents’ wealth than with their alma mater. Prospective students who are price-sensitive to their college selections could particularly use a centralized, trusted service that tells them where they get the most bang for their buck.

(3) Demand an Itemized Tuition Bill: Pressure institutions to provide a comprehensive breakdown of their cost of attendance. No doubt, there are American colleges that spend far more on their faculty than superfluous bureaucrats, and they should be rewarded for it. By making tuition breakdowns the norm, schools that make reasonable spending decisions with our money will attract more applicants and therefore be able to admit a higher-quality class. On the other hand, schools with slim student-faculty ratios that simultaneously support a long payroll of bureaucrats with six-figure salaries and opaque job descriptions will be forced to change or face decreasing demand. 

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