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6 signs of disruption: What higher education can learn from healthcare

Like many industries that have experienced disruption,higher education is on the cusp of its own disruption.
University Business, April 2015

When it comes to industry disruption, traditional healthcare organizations have many battle scars. Visits to the hospital emergency room are being replaced by visits to an urgent care center at the local strip mall. Traditional doctor referrals are being replaced by smartphone apps that direct consumers to low-cost, highly rated doctors. And traditional doctor visits are being replaced by visits to clinics at the local pharmacy or video chats on a kiosk in a shopping center. All of these changes illustrate a major shift from a business model focused on hospitals, doctors, and sickness to a business model focused on wellness and treatment in the least expensive and intensive setting.

Like many industries that have experienced disruption, legacy healthcare organizations are struggling to determine the role they will play in the new business model, and to make the extensive changes required to their structures, resources, and processes.

Higher education is on the cusp of its own disruption. “In higher education, the primary revenue streams are all facing constraint: tuition, state support, research funding, and clinical streams,” says Michael J. Mandl, Executive Vice President for Business and Administration at Emory University. “In addition, technology is changing the way people experience the world, which adds new methods for transmitting information and new opportunities to improve in-class learning. At the same time, demand for an educated workforce and an enlightened citizenry is as intense as ever. When you put these elements together, it’s inevitable that there will be some disruption.” Evidence of the disruption that could be emerging includes MOOCs offering broad online access to lectures by star faculty, start-ups like the Minerva Project promising Ivy-league-level education at a fraction of the price, experience-based learning opportunities, and online tools to determine the ROI of a college education. However, disruption is playing out very differently in different segments of higher education and has yet to shift the predominant business model.

Recognizing signs of change

One critical lesson to be learned from healthcare disruption is the importance of recognizing the signs of change early on. By recognizing and acting promptly on those signs, organizations can adapt to the changing environment while retaining maximum financial strength and maneuverability.

The conditions that have made healthcare ripe for disruption are strikingly similar to those that exist today in higher education. The six signs of disruption that follow have been harbingers for major change in healthcare and should be viewed as the same for colleges and universities throughout the country.

  • The perceived value of the service is declining. From policymakers to consumers, there has been a recognition that the U.S. healthcare system is dysfunctional and unsustainable. Healthcare spending as a percentage of GDP is significantly greater than in any other developed nation, while U.S. health system performance ranked last among 11 developed nations in a recent study. Higher education is experiencing similar questioning of the value being received for dollars being spent. Headlines like “How Many College Educated Janitors Do We Need?” express frustration with the high cost of a university education when graduation rates are low and almost half of recent college graduates work in jobs that don’t require a four-year college degree.
  • Costs to purchasers are high and have been rising more rapidly than inflation. Despite a recent slowdown, healthcare spending has increased at a rate far greater than inflation for years, threatening the stability of our nation’s economy and placing a great burden on employers and consumers. Similarly, tuition costs per student have increased at almost five times the rate of inflation since 1983, leaving students holding high levels of debt that many are unable to repay.
  • Government provides a significant degree of funding and is pushing back. Federal and state government accounted for 44 percent of healthcare spending in 2012 and 20 percent of total government expenditures. As a result, government has been aggressively seeking ways to reduce spending, both by restructuring payment methods to reward value rather than volume and by slowing the growth of payment increases. Similarly, the federal government provides about $180 billion each year to support higher education in the form of tax benefits and student financial aid. In response, calls are increasing for funding to be redesigned to reward high performance among universities. State governments, struggling to balance their budgets, have decreased their funding of higher education by 11 percent since 2008.
  • Legacy organizations don’t place a premium on convenience. Both hospitals and universities have reputations for inconvenience. Locations are centralized, and hours are limited. Visitors need to navigate campuses and buildings whose complexities reflect complex institution’s organizational structures. Consumers have difficulty tracking down individuals or information by phone or online. This situation is in stark contrast to consumers’ ability to summon a ride or find the nearest four-star Italian restaurant within seconds using a smartphone.
  • The current business model is heavy on buildings and light on technology. For both hospitals and universities, most interaction takes place on a campus populated by large buildings carrying high fixed costs. In addition, both hospitals and universities have been slow to adopt the tools for online interaction that consumers have come to expect in other walks of life. In healthcare, patients traditionally have had minimal access to online interaction with healthcare professionals or ability to access comparative information about price and quality. In higher education, despite an array of distance-learning options, the basic face-to-face nature of the teacher-student interaction has changed little in hundreds of years.
  • The ability to shift costs from one payer to another is diminishing. Traditionally, healthcare organizations have had the ability to make up for shortfalls from government payers—who often pay below cost—with higher payment from commercial insurers. Similarly, universities have been able to make up shortfalls in government funding by shifting the burden to families through tuition increases and among families through tuition discounting strategies. For both healthcare organizations and universities, this option is rapidly diminishing as all purchasers are pushing hard for lower and more transparent prices.

The combination of high costs and prices, low perceived value, and lack of convenience creates a breeding ground for lean, innovative companies that are not burdened with legacy costs or complex organizational structures. These companies can target specific services that they can deliver with high quality, low costs, and new levels of convenience, frequently using new technology.

Just five years ago, it would have been hard for many healthcare professionals to imagine that urinalysis could be done by smart phone, that there would be online bidding for patients needing a procedure, or that a company specializing in price transparency would be valued at $3 billion.

In higher education, the signs of disruption are just as pervasive. Harvard Business School is offering low-price online courses. StraighterLine allows users to access courses that fulfill degree requirements from multiple colleges. And Coursera, a provider of free access to video lectures from top universities, is beginning to work with major companies on employee training—a move that may be a step toward undercutting the necessity of a traditional college degree.

According to disruptive innovation expert Clayton Christensen, higher education is “on the edge of the crevasse,” but because many universities are still enjoying strong margins, “they don’t feel the data that their world is going to collapse.” Christensen predicts “real trouble” for legacy organizations within five years.

By heeding the signs of disruption, developing a vision of the new higher education business model, and adapting to that new model while still in a position of strength, universities can avoid some of the battle scars that healthcare organizations have experienced and transform themselves for long-term success.

--Jason Sussman and Charles Kim are analysts with Kaufman Hall, a provider of strategic, capital, and financial advisory services and software tools for healthcare and higher education organizations.

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