What Does a Billionaire’s Pledge to Pay off Student Debt Have to Do with Health Care?

This article was first published on LinkedIn on May 28, 2019.

In mid-May billionaire Robert F. Smith pledged to pay off the student loans of the graduating class at Morehouse College. The gift was compelling not only for its generosity – it’s worth about $40 million – but also for its directness. The money goes to actual people to relieve them of debt. Smith and the benefactors can meet each other now, follow each other over the coming decades, and jointly appreciate the impact of this monumental gesture.

Health care philanthropists should take a page from Smith’s giving strategy. They should embrace creative ways to provide funds directly to patients to make giving more targeted and more efficient. There are a few reasons why philanthropy, in both education and health care, needs to evolve.

First is need for more clarity about where the money goes. Education and health care are the sectors that receive the most philanthropic gifts. Most of the recipient organizations are not-for-profits, and their traditional operational philosophy is not about using resources efficiently. It’s about raising money and spending it. It’s hard for a donor to give a university or a hospital an unrestricted check and understand, specifically, how the funds are being utilized to benefit students, faculty, patients, medical staff, etc. That’s why we’re seeing more donations, like Smith’s, get earmarked. Just last year, Michael Bloomberg committed $1.8 billion to his alma mater, Johns Hopkins, to be used for financial aid.

More importantly, gifts made in education and health care must overcome a troubling problem: they can perpetuate their industry’s inefficient operations. This is a challenge with Smith’s gift. The typical student debt of a Morehouse graduate is between $35,000 and $40,000 a year. Why? Because tuition has skyrocketed. The College Board notes that tuition at four-year, not-for-profit private colleges – like Morehouse – has doubled in the last 30 years. And a major culprit in the rise in tuition is bloated administration. By simply paying off the debt, Smith is de facto supporting the inefficient operations that are responsible for generating so much debt in the first place.

Health care has a similar problem. One well-cited study indicates that at least a third of costs in the health care system are attributable to administrative expenses. When donors give money to hospitals, community organizations, etc., a chunk of it goes to stabilizing – or even growing – the heavy overhead that is driving up health care costs in America.

Then there’s the issue of moral hazard. Donors must appreciate that their dollars may not go to the neediest or most deserving simply because there are always “bad actors” in the system. The United States has one of the least healthy populations in the world, especially in the context of our incredible wealth. Many Americans engage in behaviors that negatively impact their health. When money is given to patients who have not made an effort to care for themselves, then their poor behavior is, unfortunately, rewarded.

In fact, this is one of the oxymoronic elements of the pre-existing conditions clause in the Affordable Care Act (ACA). The ACA prohibits insurers from discriminating against individuals based on pre-existing conditions. One the one hand, this is wonderful, because it provides coverage for those Americans who really need it. But it is also potentially harmful. For some, there’s no incentive to be well because coverage is available regardless of why someone may have a pre-existing condition.

And to bring it full circle…put yourself in the shoes of a Morehouse graduate’s parents whose child had no student debt. Some of these parents had sacrificed financially for years so they could save enough money to ensure that their child would start their career financially unburdened. No doubt some were angry that those who hadn’t saved and could have were given a hand-out from Smith.

How can donors give their money, especially in health care, without perpetuating the inefficient system we have? Please listen to my podcast, “Transforming Philanthropy in Health Care,” to learn about some news ways donors can get the most out of their contributions. My show, The Powers Report Podcast, airs bi-monthly. I cover strategy, technology and policy in health care, always offering up alternatives that help us all be as healthy as we can be.

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