American Dinosaurs: What's the Matter With Health Care and Education?

Welcome to America's biggest long-term challenge: Our medical and education industries are a two-headed hydra of economic inefficiency, over-eating our resources and under-serving our needy

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The problems with our nation's health care system are of course very different from the challenges facing our national education system. But when you look under the hood, you could make a strong argument that the problems are actually very much the same.

Consider the structure of American health care over the past few decades. One can think of it as serving four levels of clients: those with no insurance, those with Medicare or Medicaid, those with employer-provided insurance, and those wealthy enough to pay for all their health care services in cash, including concierge services.

Most of those who were uninsured went without any health care services much of the time. When they did get services, it was typically in the hospital emergency room when their condition was so far advanced that treatment was very expensive and delivered only at the point when a favorable outcome was very unlikely. Those on Medicare and Medicaid were insured, but the reimbursement rates were so low that many doctors simply did not take Medicare or Medicaid patients, and the doctors that did had to see very large numbers of patients to make ends meet, leaving little time for each one.

Those lucky enough to have a job with health care benefits had access to a significantly higher level and broader range of services. Actually, within this class of service, one could distinguish the run-of-the-mill client from another level: the well-connected, wealthier client who had a personal network enabling them to find out who the best specialty physicians in the country were, get these physicians to take them on as clients, and pay for the airfare and hotel costs while getting the care they needed. Finally, at the very top of the heap, are clients for whom money is no object and who pay a very expensive cash fee to a renowned internist who has only a few clients, is available to them 24/7, and refers them instantly to the finest physicians in the world. This last class of clients, like the first class, does not bother with insurance.

Clearly, we have a health care system that is not only finely stratified by the client's wealth, but is also highly inefficient -- and these two facts are related. It is well-known that when the total cost of the American health care system is divided by the size of our population, we have one of the most expensive health care systems in the world. Some say it is also one of the best, but that turns out to be true only for those within the higher ranges of the system. The outcomes for the average client are just average in an international context, and the outcomes for those clients with scarce financial resources are comparable to the health outcomes for the citizens of third world countries.

One reason this grossly unfair and highly inefficient system is so hard to change is because health insurance companies whose revenues depend on it have enormous financial and political clout. But the clients who benefit most from this system also have enormous financial and political clout. There are, by definition, only so many top-notch hospitals and doctors, and this system enables those with the most money to have virtually exclusive access to them. They will not give that privilege up without a ferocious fight. That holds true not only for the super-rich--those with concierge medical services--but also for many in the next level down, the professionals and managers who work for the better firms with generous health care plans.


Now consider our public education system. What our health care system accomplishes through its insurance system aligns with what our public education system accomplishes through the property tax used to finance our public schools. The result is the same: a highly stratified system of services differentiated by the income of the clients.

Yet funding for our public education system works differently. To a degree unmatched by any other industrialized country, the amount of money our schools receive is a function of the value of the homes in the community. This means that wealthy people can form their own school taxing district that is accessible only to people who paid a great deal of money for their home. It's an exceptionally good deal: because the community is so wealthy, their required tax rate is very low while the tax yield is very high. At the other end of the scale are the communities where people can only afford to pay very little for their homes, but ironically pay a very high tax rate for schools that have only a small fraction of the budgets available to schools in wealthier communities.

Moreover, residents of the wealthy communities get an additional and very important bonus: their children attend schools with other wealthy children. This is worth as much as or more than the money because the single most important determinant of students' academic achievement is not how much money is spent on their school, but the education level and socio-economic status of their parents. The schools serving the wealthiest students have the highest expectations, deepest cultural resources and strongest value placed on education. These schools get the best teachers, science labs, sports facilities and everything else. The students who go to these schools are the most cultured, read at home, have both parents at home, access private tutoring when they need it, and receive good health care and the strongest possible early childhood education.

In the schools serving the poor, the situation is reversed. You won't find Olympic-sized swimming pools or electron microscopes in these schools, but you will likely find students who will put down their peers who study hard and take tough courses, and teachers who assume that their students are not college-bound and thus give them a curriculum that is so unchallenging that not going to college is likely to be a self-fulfilling assumption.


In each of these two arenas, though for different reasons, the United States is now differentiating services by social class, providing separate services for each class and often making new and finely graded distinctions among social classes. In each case, the result has been the development of systems that are not merely grossly unfair, but massively inefficient. That might be simply a political matter, except that, when we compare the performance of these systems to their counterparts in other developed countries, we see that they are able to provide far better services to much larger fractions of their populations at substantially lower costs.

In education, just as in health care, the United States turns out to have the highest cost system in the developed world, on a cost-per-client basis, save only for Luxembourg. Here, too, the performance of the system overall, against every reasonable metric, is mediocre;. The defenders of the system say that, if we just overlook the poorest, the system is among the best in the world, but here, too, the statistics say otherwise--the system is among the best only for the wealthiest.

The school boards, administration, voters, property owners and real estate agents in the wealthiest communities use their enormous political influence in state legislatures to make sure that this system is not changed in any important way. They use the same influence with their state delegation to Congress for the same purpose, even making sure that wealthy districts get their "fair" share of the funds meant for assisting districts in predominantly poor communities.

This country talks about closing the gap between the lowest-performing students and the highest-performing students. But we haven't done it, and it's clear that we don't really mean it. The performance of our best and brightest is actually made possible not just by concentrating funding on them, but, most important, by surrounding them with our best teachers and, our most precious resource, our most favored students. That is not a scalable strategy. We cannot bring all or most of our students to the same global standards that our best students meet because we would have to spread our best teachers and our best students around to raise the performance of the average and below-average students. That is actually what the top-performing countries have been doing. But there is no real discussion of that in the United States any more than there is a real discussion of making our best health resources available to all, regardless of income.

This situation also holds for higher education. Roger L. Geiger has shown how our previously fairly egalitarian higher education system has separated over the last couple of decades into sectors differentiated by their clientele. Like our schools and our health care system, the clientele are differentiated by income. There is one non-selective system for those without much money, and on top of it, institutions of different status for clients with corresponding levels of wealth. At the peak is a group of research universities living very comfortably in the very core of the high value-added economy they supply with research findings and techniques.

This arrangement is appallingly inefficient. More than half of those admitted to the non-selective system fail to get a certificate or degree, their ticket to a decent job, which was the reason they signed up in the first place. Those who fail to get a degree or certificate have nothing to show for their effort but debt and time lost that they could have spent earning a living. The selective tier is equally inefficient, as is shown by the steady reduction over the past few decades in the resources devoted to instruction and a matching increase, well beyond the increases in the cost of living, in the price charged for these diminishing resources.

Here, too, we see an unfavorable comparison to the policies of the leading countries. One country after another manages to provide a greater share of the current year cohort with the equivalent of a four-year college degree. Worse still, we see our community colleges increasing class sizes, turning students away and raising tuition as state legislatures steadily reduce state subsidies for these colleges that are the lifeline on which lower-income students rely to maintain their family standard of living or, at least, to prevent it from falling.


Now, think about what this means. Health care and education together account for about 24 percent of the American domestic economy. The OECD average expenditure on healthcare and education together is 14.7 percent of other industrialized economies' GDPs, meaning that the United States spends 63 percent more than other countries spend to educate and care for its citizens. As a result, the United States has taxed itself a whopping 63 percent more than necessary to have a profile of subpar performance. Put another way, if our health and education systems were as efficient as those of the average OECD country, we would save $1.4 trillion per year and, if they were as effective as those of the average OECD country, we would experience a very large improvement in education and health outcomes at the same time.

So, what is to be done? These two systems are so big and inefficient that it is almost certain that the United States will grow increasingly uncompetitive in international commerce if we cannot fix this problem. Can we stop it? Can we right the ship and move on?

Canada did, at least in the arena of public education. Until 20 years or so ago, Canada also had a system of school finance based on local property wealth. This is no longer true, at least not in the big Western provinces. The change was made under the leadership of conservative premiers who were forced to deal with increasing voter resistance to rising local property taxes. So they led the fight to raise and spend the money for the schools at the provincial level, not the local level. School finance in those provinces is much more equitable than it used to be, because funding is no longer based on local property wealth. Canada is on the OECD list of the top 10 performers in elementary and secondary education worldwide, but it is not among the top spenders.

In 1985, two economists, Richard Nelson and Sidney Winter, wrote a book in which they suggested that successful firms were more likely lucky than smart. They pointed out that one could think about individual firms as species operating in a changing environment. As the environment changes, some firms turn out to be well-adapted to the new conditions and thrive, while others, which used to thrive, shrivel and die. One could think about entire national economies in the same way.

At a certain point in time, the systems the United States developed to finance its schools, colleges and health systems were very well adapted to their environment and helped us attain a preeminent position among national economies. But the same systems are now very badly adapted to their environment. They represent such large shares of the national economy and such vital functions in that economy that their excessive costs and poor performance could sink us all if we don't consider changing the unchangeable.