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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.

The research described in this report was conducted by RAND Education.

This report is part of the RAND Corporation perspective series. RAND perspectives present informed perspective on a timely topic that address the challenges facing the public and private sectors. All RAND perspectives undergo rigorous peer review to ensure high standards for research quality and objectivity.

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