The commonality between the insatiable rise in both healthcare costs and college tuition, post 1965, should be obvious: Massive amounts of other people’s money in the form of government programs, payments, subsidies and loan guarantees; which economists call the 3rd-party payer effect.
As exposited in the FEE article below, the U.S. Higher Education Act introduced “incentives” into the market for higher education, encouraging both the supply side and the demand side to make decisions that they would not be as likely to make under “non-stimulated” market situations.
Similarly, the passage of Medicare in 1965 sent huge surge of money into the healthcare system. The predictable consequence of this massive revenue stream was an incentive for healthcare providers to enter the market and expand services at an unprecedented magnitude and rate. Essentially, demand was spurred by new source of financing. Amy Finkelstein, et.al have done excellent work in this area. Her work indicates that Medicare funding may have allowed hospital to spend 6-fold more than what individual levels of insurance would have predicted. And that the spread of 3rd party insurance from 1950 – 1990 may explain about 50% of the increase in real per capita spending over that time period. https://economics.mit.edu/files/788
“As Bernie Sanders tweeted last year, the cost of education, in nominal dollars, has increased by roughly 3,800 percent since the mid 1960s.
What Sanders didn’t mention was that this was when the US Higher Education Act was passed (1965), which directed taxpayer dollars to low-interest loans for students pursuing college. This increased accessibility to higher education, but the flood of federal money also caused a surge in demand and costs.
The problem isn’t unsolvable, but it will require significant changes to universities and the federal loan program. “Free” tuition and student debt forgiveness will only make the problem worse.
Instead, as University of Maryland economist Peter Morici recently argued, market discipline must be brought back to our institutions of higher learning as part of any debt forgiveness.
While policy wonks offer no shortage of proposals for tweaking the federal loan program to improve it, perhaps the best solution would be to get the federal government out of the loan business all together.”