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Spending Other People's Money: What Professors And Doctors Have In Common

This article is more than 10 years old.

Consider these two common scenarios:

SCENARIO A

You go to the doctor's office and get a prescription. Later the pharmacist runs it through her computer and against your insurance--and hands you the bill. If it's a brand-name med get ready for the sticker shock. I've had to pay $10 per pill, out of pocket, when I've been under my deductible. I know another patient who had a $300 course of eye drops prescribed when a $25 alternative existed--and his doctor had no idea.

SCENARIO B

You go to class and pick up your syllabus for the semester. At the college bookstore you pick up one of the books that's been assigned. Again: sticker shock ensues. I recently was assigned this flimsy, out-of-date paperback for one of my classes. It cost $80 and was in addition to a $100 textbook also on the syllabus. I wanted to ask the professor what she was thinking (or smoking?). But like the doctor who prescribes the pill, she probably has only a dim idea what it will cost me the student.

Now let's back up. Buying medical services and buying textbooks have been regularly decried as gouge-fests. There are plenty of explanations for this whether it's greedy doctors or rapacious pharmaceutical manufacturers. Textbook publishers--who by my estimation charge about five times what a "normal book" should cost because their customers are captive--have been investigated by the feds for increasing prices at twice the rate of inflation.

Textbook publishers bribe professors by giving them free lecture slides, release a new edition every year in order to undercut the used book market, and add lots of unnecessary Web and CD bells and whistles when most students probably barely read the assigned chapters.

But rather than blame the capitalists who run both the publishing and medical industries--I think there's a better explanation.

Go back to those two scenarios. In both, the end-user or end-buyer does not have a say in what's being prescribed (or assigned). I'm not an expert on how to teach a course in health economics so I don't pick the books. Yet the expert is not the one who pays the bill. So it follows that cost is either not taken into account, or in the drug-pricing example, deliberately obscured.

Economists call this a principal-agent problem. Wikipedia has an excellent explanation. The principal (the patient/student) has outsourced spending authority to an agent (the doctor/professor) who has different incentives.

In a paper called "Where Are The Health Care Entrepreneurs" Harvard health economist David Cutler identifies third-party payers and a paucity of cost and quality information as major impediments for cost-savings or increased efficiency in the health sector. Even if a doctor wanted to prescribe the pill with the best value, she likely would lack the required information do so.

The health care solutions to the third-party payer problems have been discussed ad nauseam during the health reform debate, with proposals for ACOs, bundled payments, value-based purchasing, pay-for-performance, health savings accounts and so on.

Partly becuase of this shared problem, health and higher ed have become two of the most bloated sectors of the economy. They have been most impervious to disruption by newer, cheaper competitors. (If you're really interested in this topic read both of Clayton Christensen's books on these areas: The Innovator's Prescription and  Disrupting Class.)

In higher-ed, a few innovative companies (like Apple and Amazon) and philanthropists are nonetheless trying to reform the system. There's an "open-textbook" initiative that's gaining steam. One billionaire, Gary Michelson, is investing in publishing free digital textbooks for community college students who can't afford the $1,000/per semester bill at the bookstore. But professors would still have to be cajoled somehow into assigning these free textbooks instead of the heavy, paper, pricey ones that predominate.

Here's a quick idea on the textbook front for how to solve the principal-agent problem.

If a professor assigns books that cost more than $50 per student, per semester--take the excess, multiply it by 100 and subtract it from their salaries. If less, add the total as a bonus. Make the professors bear the weight of the external negative effects they have on the economy (and my pocketbook). On average I would say that most of my professors would take hits ranging from $2,000 to $10,000.

Guess how long the "spending the students' money" problem would last? Answer: Not even a semester.

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