In a recent article the venerable management sage Peter Drucker observed that, " . . . the cost of higher education has risen as fast as the cost of health care. And for the middle class family college education for their children is as much of a necessity as is medical care - without [either] the kids have no future." (Forbes 3/10/97) After that he went on to state the obvious, "Higher education is in deep crisis."
Drucker's observations prompt the notion that other industries, including health care in particular, have shucked off their old selves and have left lessons for higher education. The idea here is that higher education might get a few pointers from health care just as the health care industry benefited from the airline industry's rebirth after deregulation.
Each industry represents about 10 percent of the U.S. GNP at roughly $600 billion, depending on how you add it all up. Each has long relegated the customer to the bottom of the value chain and defined quality of service as the purview of the professional practitioner.
Both have relied upon high overhead costs of bricks and mortar, an expensive professional caste, a paraprofessional sub-caste, and schizophrenic organizational structure where administration is tolerated but seldom respected by the professionals. Both have relied upon subsidies (medical insurance, federally funded financial aid, taxes) to support the high premiums they charge customers. Neither paid much attention to cutting costs until recently.
It was skyrocketing costs that finally set off alarm bells in health care just as they are now ringing in higher education. Education subsidies are drying up as governments respond to low voter support (in California prison construction has the highest budget priority). Likewise, the trend in health care is to cut insurance payers out of the loop and drive provider prices down.
Several lessons have already emerged from health care that may have meaning for higher education. In becoming market-based, the health care industry learned to view the customer (read: patient, student) as the center of the process. That's a far cry from the good old days when users of health or educational services were clearly at the bottom of the value chain. Now, patients, through influential employer buying groups, demand a role in defining quality and service. With their newly acquired power the prospect of patients walking out the door threatens the delicate contractual balance that defines the world of capitated managed care.
And since patients and students have come to think of health care and higher education as commodities, new market-based concepts like customer service and retention become very important issues. Doctors may think that they are skilled practitioners of medical science and professors may take pride in their research and publications, but if the patient only sees a skilled medical mechanic and the student merely sees an instructor/test proctor then serious questions start to surface about perceptions of value-added and premium pricing.
Just as with the health-care industry, the airline industry and other sectors, higher education has suddenly discovered that technology, properly managed, typically lowers costs. In fact, cost reduction was what distance learning was all about until deep thinkers realized that technology could do more than shave overhead and expand markets. Now that it's understood that technology can provide a different form of education, a custom form based on the student's personal learning profile, it's a whole new ball game. The lesson here is that when technology creates a new business model the transformation process can't be stopped.
Another issue is that managed care forced hospitals to be more price competitive. This, in turn, generated innovation, lowered costs and varied the breadth of products and services offered. In public universities the presence of subsidies tends to inhibit cost reduction. As a result innovation is avoided or rejected and products are not varied to match different student needs. If higher education were more market-based it would soon learn to use innovation to better serve student-customer expectations.
In the new world of market-based higher education the issues of accountability, brand name recognition, replication of service standards, continuous improvement, and new product development are not far behind. Customers will expect predictability in standard products and continuous innovation to keep them on the leading edge. They will expect a common look and feel to whole suites of courses (more than just curriculum integration) all along their degree track.
Health care is struggling with the notion of creating value for the customer because of a history of inelastic demand for its services. Higher education has the same problem. But unless we provide something more than young adult day care, other providers in the private sector will figure it out. Soon.
Under managed care, hospitals, ever attentive to cost, no longer need all the physicians who wish to work with them. Institutions simply don't have to contract with 15 oncologists when a demand analysis shows that three are plenty. As a result, many doctors find themselves without hospital affiliation. And without hospital affiliation, there's no place to send your patients. As managed care undermined physician economic security, doctors circled their wagons and formed Independent Physician Associations.
IPAs were formed as a protective reaction to the new health care economics so that now hospitals make deals directly with IPAs -
not with individual physicians. Because doctors who deliver lots of patients are in high demand, they quickly become limited partners in an IPA. There are a lot of very good independent physicians who were left standing without a seat when the music stopped.
By simply replacing "physician" with "professor" you have a new model for market-based higher education. Already professor groups have formed (independent professor associations) for consulting and as executive education resources. Are departmental faculty IPAs far behind? And what happens to the independents who can't or won't play the new game or deliver enough students?
Another interesting development that may transfer to higher education is the growing role of the broker. Health care brokers have gained increasing clout by acting as an aggregating intermediary between smaller organizations and providers. Where individuals or medium-sized groups have little or no bargaining power in setting prices the broker adds value by bundling up lots of employees (modestly called lives in the health care industry). Large packages of lives produce tremendous leverage.
Brokers may soon act in a similar fashion for group purchases of continuing education. Organizations in similar industries, professional associations or even regional buying groups would benefit from brokers making deals for discounted training or specialized educational packages. Another possibility might be a national network of MBA students or undergraduates who affiliate for special discount pricing of degrees.
A trend that recently received press attention is professional unionization. Airline pilots started it and now physicians are signing up in droves. Many faculty are already union members. One disturbing new trend of professional unions is their exclusionary nature. The AMA's new policy against "foreign-born but U.S.-educated" physicians practicing medicine is alarming. Although a clear sign that times are getting tougher in the medical arts, it prompts the question whether similar faculty policies are far behind?
Medicine, high technology, and higher education have always showcased the best of U.S. capabilities. Now, much of high tech has gone overseas, managed care has undermined the high standards of traditional fee-based medicine, and the prospect of global distance learning may undermine yet another pillar of our social temple.
But top providers will continue to thrive as the market differentiates. There will always be an IBM, an Intel and a Microsoft. The Mayo Clinic and top university teaching hospitals such as UCLA and Johns Hopkins will continue to provide leading edge care and research. And whether or not the University of Phoenix sets tomorrow's gold standard for international consumer education there will always be Harvard, the University of California, and others in the upper tier. Even if their course file servers happen to be in Costa Rica.
Jack Gregg is associate director of the Office of Executive Education at the University of California, Irvine's Graduate School of Management and consults on distance learning. [email protected].