The Department of Health and Human Services has finalized a regulation that requires drug companies to disclose the list price of expensive drugs (those costing more than $35 per month) in any television advertising if they wish to continue qualifying for Medicare and Medicaid reimbursement. The administration’s move signals a belief in the power of transparency to curb the cost of products and services—and that principle applies beyond the health-care industry. The new policy could set off alarm bells for, say, U.S. colleges and universities.
Like drug companies, hotels, and airlines, American higher education is an inveterate price discriminator. Undeterred by Ivy League price-fixing allegations (and a resulting consent decree), institutions leverage near-perfect information about family finances to drain the last dollar from parents and students. Universities set tuition at staggeringly high levels, and then offer discounts, case by case. Dozens of colleges and universities charge annual tuition over $50,000. Columbia charged $59,430 in 2018 and is bound to be one of the first to crack the $60,000 mark in the next academic year. Twelve others, including less selective schools like Trinity, Bucknell, Franklin and Marshall, and Kenyon are already over $55,000.
With discounts masked as grants and pseudo-scholarships, the true cost of getting a degree is obscured, and families can’t compare actual costs with the value they expect to receive. The average discount on the “sticker price” now exceeds 50 percent, but the terms of student financial aid packages can change from year to year. Grants may convert to loans, and students often accrue extra debt rather than deal with the transaction costs of transferring to a cheaper college.
Price discrimination in higher education suppresses the college-going aspirations of academically promising low-income and first-generation students who—research shows—often attend subpar local or state schools, for fear of the economic burden associated with more selective (but pricier) schools. High tuition also suppresses enrollment across colleges and universities, as students worry about the continuation of their financial aid. Finally, high tuition also accounts, at least in part, for the twin crises of college affordability and student loan debt, now at $1.5 trillion, or nearly $40,000 for every college graduate who has taken out loans.
It’s not lost on the Trump administration that Americans spend about the same on colleges and universities as they do on drugs—approximately $500 billion annually. And sources within the White House have indicated that higher education may be the next front of the administration’s battle for price transparency. What if the Department of Education required Title IV-eligible institutions to include tuition prices in the myriad of higher education ads that crowd not just airwaves (colleges spend an estimated $600 million each year on TV advertising), but also billboards, airports, and local papers? Even if such a rule doesn’t lead to lower list prices, ads referencing these high costs will be less effective at generating enrollment in expensive programs and cause colleges and universities to rethink the billions of dollars they spend on marketing, which gets passed on to students, in the form of higher tuition.
If successful, the administration’s approach could serve as a model for forcing price transparency. Colleges and universities should be required to post their stated costs up front, or desist from advertising. American higher education could certainly benefit from a dose of honesty in how it markets itself.