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December 28, 1994
"It's Crunch Time for Health and Education: Both are Run by Omnivorous Bureaucracies which can Absorb Almost Any Amount of Money"
San Jose Mercury News
By Timothy Taylor
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FROM an economic point of view, the problem of reforming the U.S. education system appears strangely similar to the problem of health finance reform.

Both areas have seen a steady rise in spending. Since 1960, for example, U.S. spending on health care, measured on a per capita basis, has risen about 5 percent faster than inflation every year. Similarly, real education spending per K-12 student has risen by about 3.5 percent per year for 50 years.

Demographic and technological pressures will create pressure for still higher spending. In health care, an aging population, combined with the magical technologies now being developed, will drive up demand. In education, the number of students in K-12 schools declined between 1970 and 1990, making it possible to spend more per student without raising overall spending. But now enrollments are rising again, and combined with the allure of new tools for computerized learning, education budgets are on the rise again.

In both education and health care, there is deep concern over what society is getting for its money. In international comparisons, America doesn't look particularly hale and hearty when measured on basic standards like life expectancy and infant mortality. The U.S. education system doesn't seem up to the international competition, either. In a recent book called "Making Schools Work: Improving Performance and Controlling Costs," a group of social scientists led by Eric Hanushek note: "Students from the United States perform worse than those from other countries. Although some variation occurs across tests, there is little evidence of significantly narrowing international performance gaps." These grim international comparisons coincide with a litany of complaints from parents and potential employers that many of America's high school graduates can't do simple calculations, or comprehend the main ideas of a written document, or understand the meaning of numbers in a table or chart.

It seems heart-wrenching and wrong that a person should suffer or die from a curable medical condition. It is tragic to think of a child's life possibilities being stunted by a poor education.

Little wonder that there is a temptation, with both health care and education, to keep raising the amount of resources spent, especially if some of those resources can be aimed at the disadvantaged. Both industries have powerful entrenched interests - the doctors, nurses, and hospitals in health care, and the teacher's unions in education - which usually argue for higher spending as the answer to any and all problems.

But a hard truth is that in this era of tight government budgets, large spending increases aren't likely. An even harder truth is that the medical and education industries are perfectly capable of soaking up additional resources without improving anyone's health or learning.

In health care, much of the increase in costs over time is due to the use of expensive new tests, treatments and technologies. However, it's not always clear whether a complex new surgical procedure is better for one's health than two aspirin, bed rest and chicken soup.

In education, extra resources often seem to go for goals like reducing class size or giving teachers a raise for additional graduate work, even though there isn't much evidence that these steps raise student achievement.

Both health care and education are run by omnipresent and omnivorous bureaucracies which can absorb almost any amount of money.

So the policy problem, as economists see it, is to design a system where the incentives are aligned toward using the existing resources to produce more health and learning.

In health care, despite the wreckage of Clinton's health care proposal last summer, such a system is taking shape. All the serious plans for health care reform encourage the development of institutions where many health plans will receive a fixed amount of money - like a health maintenance organization - for agreeing to treat each patient over the course of the forthcoming year.

Such institutions have an obvious incentive to hold down costs, since they are paid only a fixed amount per person. When such plans compete, they will be under pressure to main a high quality of service by customers, who have the ability to switch to another plan, and by those who pay the bills, like large employers who decide which plans to offer their workers.

In K-12 education, it's harder to see how a model of competition would work. Limiting school budgets is easy enough. But it's harder for parents to judge their children's education than it is to judge their personal medical care. Even if parents have qualms about a school, switching schools is harder than switching medical plans: the school year is inflexible; it's tough for kids to leave friends and teachers; transportation presents problems. Moreover, education doesn't have the equivalent of large employers who are paying directly for services, and demanding value for money.

The acid test of any proposed school reform should thus be how it builds tangible incentives for quality. In "Making Schools Work," Hanushek reveals a suspicion that there isn't any blueprint for the perfect school. Instead, the problem is to encourage schools to learn about how their programs work, to propagate successful innovations, and to create a continuous process of change and adaptation within the school itself.

This is a matter of carrots and sticks. What rewards will the best teachers get, and how will the worst teachers be pushed into another line of work?

A final similarity between health and education is that in both cases, changes outside the system may have more impact on health and learning than changes inside the system.

Among health care economists, it is commonplace to note that changes in exercise, diet and use of tobacco and alcohol will have a far larger effect on America's health than any conceivable plan of national health insurance.

Similarly, if every child had decent meals, loving parents, role models of adults with jobs, a safe neighborhood, and a home with conversation, books and a television that was turned off most of the time, those changes would have a far greater effect on learning than any conceivable school reform program.

Changing America's lifestyle and social problems is a tall task. But pretending that medical and education professionals can cure these problems without help from the rest of us isn't very realistic, either.

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