Leveraging Shared Savings to Promote High-Quality, Cost-Effective Higher Education

This Perspective examines the way in which the dominant funding model in higher education, based on semester credit hours (SCHs), can promote cost inefficiencies. We propose a new approach — the Shared Savings Model (SSM) — that provides an alternative incentive structure for providers of higher education. The SSM leverages the fact that when institutions increase productivity, they also create considerable savings. While the traditional SCH-based model returns all of these savings back to taxpayers and students, leaving little incentive for institutions to produce them, the SSM promotes productivity-enhancing activities and processes by quantifying the cost savings from increased productivity and returning a portion back to the institutions that generate them. Institutions may find the SSM more palatable than traditional outcomes based funding approaches because it operates in conjunction with the SCH-based model, can preserve current SCH-based funding rates, and is voluntary for institutions. We lay out a framework for the model and offer recommendations for implementation, including approaches to increase productivity and considerations for ensuring quality, to guide institutions interested in pursuing funding innovations.