College student discussing assignment with tutor


(The RAND Blog)

October 22, 2015

The Shared Savings Model: An Innovative Way to Attack Rapidly Rising College Costs

Photo by Cathy Yeulet/iStock

by Trey Miller and Van L. Davis

It's no secret that the higher cost of higher education has many families struggling to afford it. Recent attention from the media and policymakers has primarily focused on proposals to subsidize college tuition, an approach that does nothing to address the underlying causes of continued upward cost pressures on higher education. In fact, if institutions receive infusions of large amounts of money from tuition-subsidy plans, it could have an unintentional effect and actually reduce the economic pressure on the institutions to search for ways to cut costs. The challenge facing policymakers is how to lessen the cost pressure felt by families while incentivizing institutions to innovate to reduce cost and improve quality.

Why does the current system of higher education funding tend to disincentivize innovation and efficiency? Traditionally, public universities have received state dollars based on “educational inputs,” or enrolled students (specifically the number of semester credit hours students are enrolled in) rather than “educational outputs” (courses completed or number of graduates). So what might be a cheaper and more efficient degree pathway for students may not be in the financial best interests of institutions, since they receive funds even if students don't complete courses or graduate in a timely and efficient manner. While institutions of higher learning certainly have an interest in seeing their students graduate, educational funding is complex and may inadvertently disincentivize schools from promoting practices and services that serve to reduce the number of semester credit hours it takes for students to obtain their degrees or accelerate student progress.

Several states have attempted to tackle the problem by replacing enrollment and semester credit-hour funding with outcomes-based funding. But this presents its own set of challenges. For example, institutional budgeting cycles and expenses require ongoing funding. Institutions bear the costs of serving their students regardless of whether students make progress toward degrees and credentials. And perhaps most importantly, as long as we as a society consider education to be a public good that should be accessible to as many people as possible, we must make sure that in the rush to reward performance, we do not discourage institutions from working with students at risk of not completing a degree—especially first-generation college students and those from disadvantaged backgrounds, who could most benefit from the economic opportunity a college degree still affords.

What if institutions were financially incentivized to increase their efficiency without sacrificing educational quality or equity? Existing and emerging efforts—such as aggressive counseling that helps minimize unneeded coursework, increased acceptance of Advanced Placement and dual-credit courses, credit by exam, and prior-learning assessments—can help schools increase productivity and reduce the time students need to earn a degree. Yet under current semester-credit-hour based funding models, these sometimes costly practices may cause institutions to receive less state higher education funding. But what if—contrary to the traditional model that returns efficiency savings to taxpayers and students—the resulting decreased time needed to graduate was quantified into cost savings that was shared with the institutions that produce them?

RAND researchers recently modeled such an approach to shared savings, in which cost savings from increased productivity are quantified and a portion returned to the institution as a way of promoting productivity-enhancing activities and processes. Key elements of this model include:

  • Maintaining the traditional funding allocation model, and using the shared savings payments as an additional incentive.
  • Making incentive payments contingent on meeting a set of agreed-upon quality metrics, so that institutions do not improve productivity by lowering quality or increasing student selectivity.
  • Designing the shared savings payments so that funding allocations to schools under the new model are equal to or less than the amount the state would provide under the traditional model.

While the final point might represent an actual decline in the total level of state funding, it also represents a true decline in total instructional and support costs. From the institution's perspective, the shared savings payment is really an improved margin on the instruction of successful graduates.

While tuition subsidies make for appealing presidential campaign goals, the unintended consequences could prove disastrous if policymakers don't similarly incentivize schools to rein in costs while providing efficient, high-quality education. The shared savings model could potentially offer a win-win approach that serves the needs of taxpayers, families, higher education institutions, and the public good.

Trey Miller is an economist at the nonprofit, nonpartisan RAND Corporation. Van Davis was director of innovations in higher education at the Texas Higher Education Coordinating Board when he co-authored the study on which this commentary is based. He is now associate vice president of higher education research at Blackboard Inc.

Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.