Why are costs of certain things, most notably education and healthcare, skyrocketing so quickly, with relatively little improvement in quality? A few years ago, SlateStarCodex and Marginal Revolution both had interesting pieces on this "cost disease" phenomenon. I think both of them were coming at it wrong.

Cost disease is really about two questions:

  • Costs in education, healthcare, etc keep rising faster than inflation, so where is all that extra money going? This is an accounting question.
  • Why is so much money going there? This is an economics question.

Both the SSC and the MR pieces were mostly speculation on the second question. I think that's premature; the first step should be to go look at where all the extra money is going. Don't try to draw a map of a city by sitting in an apartment with the curtains closed; go look at the world, in detail, and let that steer the theorizing.

In this post, we'll dig into the accounting data for college costs, especially for 4-year private nonprofit colleges. The main theory we'll end up at, based on the accounting data, is that college costs are driven mainly by a large increase in diversity of courses available, which results in much lower student/faculty ratios, and correspondingly higher costs per student.

Accounting Data

For any particular college, if you had access to the books, you could simply look through all the expenditures, add it up, and see how expenditures changed over the years. I don’t know of any college which puts its books on the internet for all to see going back to the ‘60’s. But there is the National Center for Education Statistics, which compiles some high-level accounting data on all colleges in the US, and publishes an annual digest.

Let’s start at the beginning: what’s the cost of college, by year?

Source

This is undergraduate tuition & required fees at 4-year colleges. Data separating private nonprofit/for-profit only goes back to 1999, because enrollment in for-profit colleges was negligible prior to the late ‘90’s. Note that all costs in this post, both in the graphs and the discussion, are adjusted to 2013 dollars.

From here on out we’re going to focus only on private, nonprofit 4-year colleges from 1999 to 2013, because that’s what the Digest of Education Statistics has data on. (Again, if anyone can find good data back to the ‘60’s, please let me know!)

We’re going to follow the money on its journey.

From tuition, comes revenue for colleges. Let’s make sure the payments arrive safe and sound…

Source; FTE = full-time enrolled student; all graphs from here on out show inflation-adjusted costs per FTE per year unless otherwise specified.

Well that’s informative! If you’ve been to a private 4-year nonprofit university lately, you probably noticed that most people don’t actually pay the sticker cost. This data makes it pretty clear: actual expenditure on tuition is a lot lower than the sticker cost suggests. More to the point, nominal tuition grows much faster than actual tuition revenue. From 1999 to 2013, nominal tuition grew by 42.0% (about 3% per year), whereas tuition revenue grew by 23.7% (about 1.7% per year).

So roughly half the supposed growth in private college cost comes just from the games colleges play with their sticker-price tuition. If we look at what students actually pay - what colleges actually receive in tuition revenue - growth is lower by a factor of two.

But we’re not done yet! Remember, these numbers are all inflation-adjusted, so the remaining 1.7% annual growth is still 1.7% on top of inflation. So, we still want to know why college costs are growing faster than inflation.

Before we move on to expenses, a little more on revenue. Tuition revenue is less than half the revenue of private nonprofit colleges. Most of the rest comes from a combination of federal/state grants, private gifts, and investments. Key facts:

Grants and gifts cover the lion’s share of non-investment revenue, but they’re roughly flat from 1999-2013. 

Investment revenue is very noisy, and colleges mostly don’t rely on their portfolios to cover costs.

Other than a rise in profits from hospitals, tuition was the only category of revenue to grow significantly and steadily.

I don’t want too much data-clutter, so the relevant graphs are at the end of the post. The important takeaway here is that, even though tuition is less than half of colleges’ revenue, it absorbs pretty much all of the growth in expenses.

With all that in mind, let’s look at non-investment revenue compared to expenditures.

Source

That’s comforting: non-investment revenue is pretty close to expenditures. This is a good justification for ignoring investment revenue. As expected, both non-investment revenue and expenditures are growing steadily.

Now, how do all those expenditures break down?

 

Again, everything is per FTE per year. So support cost (student services, academic and institutional support) is roughly comparable to instruction cost (teaching), and the two have risen at similar rates in the 1999-2013 window. Research expenditures, meanwhile, have been pretty flat.

Between them, support and instruction expenditures added about $5800 per FTE during this period, while (actual) tuition only increased by about $3900. What about the other $2000? About $1000 of it came from cutting expenses in public service, grant-based financial aid, and other costs. Another $1000 came from net profit in university-owned hospitals, which became quite profitable during this period.

So colleges really have been tightening their belts, cutting back on things like public service and grant-based financial aid, making money off their hospitals… and all the money from that belt-tightening, along with tuition increases, has gone back into paying professors and staff. 

Let’s keep following the money. Next stop, professors and staff. Why are costs for instruction and support increasing faster than inflation, year after year?

Well, as the professors will tell you, it’s not their salaries. Inflation-adjusted average instructor salaries rose from $81500 to $87000 over the period (source). Full professor salaries rose a bit more, and were offset by dramatically increasing numbers of graduate assistants and associate professors and whatnot. Bottom line, average inflation-adjusted salaries increased, but not enough to account for the growth in expenditure.

The bigger factor was a decrease in student-faculty ratio. The Digest only gives numbers for 1993, 2003, and 2013, but from 2003 to 2013, the student-professor ratio dropped from 11.9 to 10.6 at private nonprofit colleges. That’s a 12% increase in professors per student. Combined with the 7% increase in salary, that’s just about right to account for the 18% increase in instruction costs.

The data in the digest does not provide a clear story about the increase in support expenditure; it doesn’t have much information on non-instructional staff other than the expenditures. But it does clearly follow the instructional-faculty costs pretty closely. Based on that, my guess is that institutions generally need to spend a roughly-fixed amount of resources on support per faculty member, so the increase in support cost is driven mainly by the increase in faculty (plus probably a small increase in support salaries, similar to the small increase in faculty salaries).

Crosscheck: Falling Student/Faculty Ratio

Unfortunately, the relevant revenue and expenditures data from the Digest only goes back to 1999, whereas rapid growth in college prices started around 1980. Were student-faculty and student-staff ratios the main source of cost increases all along? I expect the answer is yes, although this data set doesn’t go back far enough to check. One quick sanity check for law schools in particular is provided by the Bar Association:

Source

Sure enough, student faculty ratios at law schools have fallen steadily since the early ‘80’s, by a factor of 2 for the largest schools. So it’s quite plausible that student-faculty ratios have been the main source of cost increase all along.

Why The Falling Student/Faculty Ratio?

Decreasing student/faculty ratios mean at least one of three things:

  • Individual faculty are teaching fewer classes
  • Individual students are taking more classes
  • Classes are smaller

In principle, any of these scenarios could be identified with the right data. In practice, data on e.g. class size in college is hard to come by, but many answers can be found just from historical course catalogues. Berkeley is particularly helpful; their course catalogues are available online going back to 1870.

If I really wanted my data to be perfect, I’d go through the course catalogues and count the number of classes (or hire someone else to do so). But for now, I’m just looking for a rough estimate, so I’ll use the number of pages in the course catalogue as a stand-in for the number of classes. Berkeley’s catalogue has kept a pretty consistent three-column format since the mid-70’s, so hopefully this estimate won’t be too far off the mark.

Anyway, looking at the number of pages in Berkeley’s course catalogue by year gives a very satisfying graph:

 

These numbers line up neatly with the numbers from the accounting section. From 2003-2012, the length of the course catalogue increased by 11.0%; the previous section found that faculty per student increased by 12% from 2003-2013. Similarly, over this whole period (starting from 1976), the length of the course catalogue almost doubled; the student/faculty ratio chart for law schools in the previous section suggests that the number of faculty per student has almost doubled over roughly the same period (at least for law schools).

The course catalogue also lists all of Berkeley’s professors. Again, I didn’t count them all, but I searched for “Ph.D.” and counted the hits. This is definitely a noisy measure, since “Ph.D.” doesn’t just appear after professors’ names in the catalogue, but it should suffice for a quick-and-dirty check. In the 1980-81 catalogue, there were 2139 hits for “Ph.D.” and the catalogue was 239 pages, a ratio of 8.9. In the 2011-2013 catalogue, there were 4132 hits and the catalogue was 414 pages, a ratio of 10.0. So that difference is pretty small; the main takeaway is that the number of courses taught per professor has remained roughly constant even though the number of faculty per student has roughly doubled.

Going back to our list of possible drivers of lower student/faculty ratios:

  • Individual faculty are teaching fewer classes -> nope.
  • Individual students are taking more classes
  • Classes are smaller

I doubt there’s any statistics on how many classes students take, but… sanity check. Are students today taking twice as many courses as students thirty years ago? No way. Maybe there’s been some change, but there’s no way it’s the lion’s share of the effect.

That just leaves one possibility: classes are smaller.

Great! So, colleges could cut their costs in half by trading small sections for large lecture halls, right?

Maybe, but there's a bit more to it than that.

If the number of classes offered at a typical college has roughly doubled - as seems to be the case for Berkeley - then it’s not just twice as many sections of Math 101. After all, we measured the growth in courses offered by looking at number of pages in the course catalogue… and multiple sections of the same course usually go under a single entry in the catalogue.

Classes aren’t just half the size; there are twice as many different classes now compared to thirty years ago. If the data and assumptions here generalize, then there’s been a cambrian explosion in diversity of academic subjects, creating a proliferation of new courses and specialties. Anyone who’s been in academia should be able to confirm that this matches experience. At my alma mater Harvey Mudd, for instance, this period saw two new departments created (biology and computer science), along with more specialties within the existing departments.

Summary

We started with the sticker price of tuition, and immediately saw that sticker price is much larger and grows much faster than the actual tuition revenue per student (at least at private 4-year nonprofit colleges/universities). So a big part of the growth of cost in college is that colleges play games with the sticker price, which doesn’t really reflect the actual tuition paid. But that only accounts for half the inflation-adjusted growth, so we have to keep looking.

Next, we followed the money: from tuition and other revenue to overall expenditures to expenditures by category and finally to student-faculty ratio, which is the main driver of cost growth over this period (along with its support-staff equivalent).

Then, we compared to some direct data on student/faculty ratios in law schools, confirming that the ratio has fallen by roughly the amount suggested by the accounting data. Finally, we looked at historical course catalogues, and saw that the number of different classes increased in proportion to the number of faculty per student.

This finally gives us a satisfying answer to our original accounting question: where does all the money go? Growth in college cost has practically all gone to more faculty and staff per student. But more qualitatively, the growth in faculty and staff per student has fed a cambrian explosion in academic specialties, as shown by a proliferation of new courses.

Appendix: Stray Graphs

All sources for these graphs were linked above. All costs are per FTE per year, for private nonprofit 4-year institutions, adjusted for inflation.

Investments: large and noisy, but mostly just keep to themselves.
All the other revenue sources. Note that tuition and hospital revenues are the only categories to show consistent growth.
Profits from university hospitals increased from zero to about $1000 per FTE.
Slightly more granular support expenditures.

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Harvard tells us that their median class size is 12 and over 75% of their courses have fewer than 20 students.

Smaller class sizes sounds pretty good! Maybe worth paying for? But I am reminded of the claim that most flights are empty, even though most people find themselves on full flights. Similarly, most person-class-hours might be spent in the biggest classes (cf the inspection paradox).

Can you elaborate on what that claim means? I'm legit confused about what it means. If most flights are empty, and a few are full, then of course people would find themselves on full flights.

It is pointing out that having tons of small classes few people take is a way to drive down the average while keeping the actual experience of students roughly the same. So Harvard might have, say, many, many senior- level small classes, but could still have all of the intro and even sophomore / junior level classes, which are half of each student's experience, be in huge impersonal classes.

...but that doesn't match what I've heard about the student experience, so IMO it's unlikely to be the explanation.

Full flights have more people on them. If you have 100 flights with one person and 1 flight with 200 people, most of the people in those flights are on the 200 person flight.

Curated. "Cost disease" is an interesting and disturbing phenomenon with no settled, consensus explanation. In my mind, that makes it an interesting test case for our rationality/world modeling. I appreciate this post for taking another crack at the problem and being virtuously empirical in doing so, including nice creative tricks like "count the number of pages in the catalog" as a proxy. Full points for "how to measure anything"-mindset.

Prestigious colleges have limited supply and infinite subsidized demand, just like hospitals; and an ideology of aristocratic appearances that forgives them to simply take the profits and pay it to barons, unlike Elsevier.  The money has to be wasted somehow, given that the cost of education/healthcare has to skyrocket somehow, to balance demand with the constrained supply, since nobody is allowed to just pocket all of that money as a profit unless they can appear to spend most of it on good-appearance college/hospital expenses.

The slow forces of entropy, of internal costs rising when there's no competition to drive you out of business and nobody with the power to fix anything loses their job about the increased costs, are sufficient to the task, in education and healthcare.  If you started shrinking the course catalog and expanding the classes again, there would need to be some other way to balance the hugely subsidized demand with the sharply bounded supply.  The money has to be wasted somehow.

Economics is king here.

But first, the supply isn't as bounded as it appears - college tuitions have been going up in state schools and schools which expanded, and their costs have also risen. And many of those state schools are growing, and are relatively prestigious.  Notice that UCLA and UC Berkeley are each top 25, with 30k students each, but out of state tuition is still >$40k. And there is competition both within and between those schools - they could spend the money on research, which the professors want money for,  or give the staff raises instead of wasting the money on class sizes. So there is something left to explain - why are they wasting money in this particular way, instead of wasting it on things the people putatively in charge of the schools want?

Note that elite colleges are not revenue or profit maximizers. For the normal laws of economics to apply, a school needs to be either in a competitive field where there is a risk of the school going bankrupt, or there have to be people at the school who are acting as if that is the case. But at elite colleges like Princeton or Harvard, neither of those are the case.

This happens because although there is infinite demand to be a student, the limiting factor is not price. In a normal market, the price would rises until demand equals price. At Princeton or Harvard, this price would probably be something like a million dollars per student-year or something like that. But at elite colleges, there is a different algorithm used to allocate slots: the admissions office. The admissions offices are Harvard and Princeton are not told how much the applicants can afford, breaking the loop. Not only that, they explicitly allocate by looking for applicants who can’t traditionally afford it even at the average price.

You may think that loans explain this, letting anyone pay the highest price and then deal with the consequences later. However, Princeton and Harvard do not ask any of their students to take out loans, instead subsidizing the cost of the lower income students with alumni donations and higher income students. If you are a student whose family working wt minimum wage jobs, you will pay $0 to go, assuming you’re smart enough.

Obviously this means that richer applicants will start competing on non-monetary accomplishments, using their money as leverage, but this is only so effective. Admissions offices are well aware that this happens and take this type of signaling as a negative sign. Some of it still works, but it only works very ineffectively.

Elite colleges have also considered a system where all the slots are allocated randomly to applicants who meet a certain minimum bar. There would be competition to get over the bar, but the bar is already low enough that many many students get over it by spending $0.

Beyond all that, Princeton and Harvard have enough reputation, alumni goodwill, and saved money that they could choose to act essentially however they want and they would still have enough money to operate as normal. Because of that, they do not face any pressure to raise tuition.

Overall, modeling elite nonprofit colleges like this as rational agents in the economic system is fundamentally flawed. When demand is infinite but supply is constrained, and the allocation method is not monetary, the normal rules of economics no longer apply.

I wanted to substantiate and boost this comment with some data from the Princeton's admissions office article on its aid program :

  • Admission is need-blind for all applicants, including international students.
  • Princeton financial aid is awarded solely based on need; there are no merit scholarships. (If you are good enough to get in, they will ensure that you will be able to afford it)
  • The full need of every admitted student is met through grants.

The link also has a breakdown of how much aid is provided depending on the student's gross family income. 

In terms of economics, such elite and wealthy institutions are playing a different game - Their endowments are on the orders of tens of Billions of US Dollars, and so they are not trying to make money off their students, but instead trying to admit students that they think will be promising and capable enough to boost the institution's prestige and network much later down the line. This means that the focus is on the admissions office (instead of the finance office), which you can also guess is subject to no small amount of scrutiny and drama as well.

That's true at the prestigious four year colleges. But there are hundreds of private four year colleges. Their supply of students is stagnant and beginning to backslide. If you talk to private four year college admissions officers, many are afraid of the coming great contraction in school aged people. Only Texas isn't having a contraction.

In any case, in John's model, that coming contraction should result in a decrease in number of specialized courses. We'll see. Courses might be somewhat sticky though.

That tells us the why, but not the how.

Also, you are assuming the money is wasted, no matter what. (Amount wasted relative to those paying being held constant (or the circumstances creating constraints that provide a lower bound) is probably the relevant consideration in this model.)

since nobody is allowed to just pocket all of that money as a profit

Is this because they are non-profits? For-profit enterprises like Apple seem to have no trouble capturing 40% of revenue as profit, so somebody is allowed to. What is the rule?

A major difference with Apple is they aren't asking any 3rd party to fund loans (e.g. Dept. of Edu. & Colleges) or pay for service (Med insurance), so zero organized pushback on price.  And in the case of Apple's luxury products the absurd price tag and unaffordability to the masses is part of the status symbol they're selling.

Both the SSC and the MR pieces were mostly speculation on the second question. I think that's premature; the first step should be to go look at where all the extra money is going. Don't try to draw a map of a city by sitting in an apartment with the curtains closed; go look at the world, in detail, and let that steer the theorizing.

I got a lot of value out of this, thank you. It's one of those things that seems obvious in retrospect, but nevertheless is something that I and I think most others tend to get wrong, at least more often than we should.

And I like how the point is a general one, applying to lots of different situations. But the post really keeps things concrete and at the object level, which pedagogically, I'm a big believer in.

Excellent gears-level account of what's going on, thank you.

This seems to suggest several alternative models for college education I've never considered before:

  • Have colleges with very specific, limited curricula as independent institutions and a set professor/student ratio, with several credits per semester assigned to some sort of self-directed learning, where the student takes an online course or pursues some other educational activity, and perhaps meets up with a mentor/student group/professor once a week to discuss it.
  • Break up the four-year college paradigm into two separate institutions, much like community colleges currently function.  We can imagine an explore/exploit dichotomy here, where there are two-year institutions dedicated to providing an incredibly broad array of classes that students attend first, after which they matriculate to a second two-year school for a specific major.  The first institution is basically a broader community college, which can already keep costs low.  The second avoids the pitfall of breadth you outline above.
  • Legislation requiring better price disclosure?  That gap between nominal and actual tuition seems particularly insidious to me, as I suspect something similar is going on with medicine.
  • Oddly enough, better housing/zoning policy, because (especially for undergraduates) housing costs are usually a large part of the bill.  Do the tuition price increases account for the entirety of college price increases?  How have college housing/food costs changed over time?

Once again, great work.

These are good points! I have been thinking the same thing. However, I don't imagine the upper institute requiring prerequisites, just an entrance exam. But a four year college offers basically the same thing except they lower transaction costs to basically zero or making that decision to commit to something you like. Hence declaring or changing majors is usually easy if you do it sophomore year.

The price disclosure issue isn't a problem. You can Google average cost of any private college and it will give a good ballpark estimate which matches the OPs 20k+ chart. Colleges engage in near perfect price discrimination. It's not really considered nefarious, because it's both redistributive and expands supply. The richer pay more, thus subsidizing the poorer. This allow more students than otherwise would be able to to afford the college.

This price discrimination expands supply by increasing the absolute quantity of students who can afford the schooling there. Charging 20k for everyone would allow fewer students to attend than charging 30k for some and 10k for others.

I agree about using an entrance exam over prerequisites.  Depending on the specifics, I'd favor an entrance project over/alongside an entrance exam - basically a portfolio-like construct of work in the field (anything from solved sets of physics problems to github pages to artwork could count).

The thing with price disclosure is that, in order to facilitate charging wealthier students more, colleges are acting to obscure how much they cost.  I understand it as a part of trading off a sacred value (education) versus a mundane one (money), and thus suboptimal.

Perhaps it makes more sense to have a cutoff, with students who can afford it paying, and those who can't being entirely supported by the institution's endowment (at least in cases where the institution has a large endowment)?

I'd suggest another model. Separate the research part of academia from the teaching part of academia. I currently am attending an institution that is nearly completely a teaching institution (mainly focused on engineering, health sciences, computing, and trades). The instructors are focused on teaching rather than research.

As for the research side of things, I'd suggest a department of research development as part of every government.

Something like this exists in the French classe préparatoire system. Basically imagine highschool, but for the first two years of college education, and super hard, competitive and elitist (and without tuition fees). The point is the teachers are full time teachers and in my experience both as a student and a teacher it is way better than what universities can offer.

It is however quite expensive due to a huge teacher/student ratio, and can be hard for the mental health of students due to the tremenduous work charge. I really don't know how the overall cost/benefits analysis work out, but all else being equal it is evidence for the "full time teachers better than half teacher/half researcher" idea.

Got this in my email and wanted to leave a note in addition to my double upvote that this was a great post. I’ve been extremely distressed by Cost Disease and see/saw it as one of the chief ills of our society. Am really bugged by a national conversation about forgiving student loans but minimal investigation into what these loans were even for.
Great post, good investigation and I hope someone does the same investigation for medicine.

Thanks very much for writing this very diligent analysis.

I think you do a good job of analyzing the student/faculty ratio, but unless I have misread it seems like this is only about half the answer. 'Support' expenses rose by even more than 'Instruction', and the former category seems less linked to the diversity of courses offered than to things like the proliferation of Deans, student welfare initiatives, fancy buildings, etc.

I expect that the need for "support" roles scales roughly-linearly with the number of faculty. As I understand it, this is how most businesses ordinarily work, i.e. the need for support staff is roughly proportional to the number of object-level workers, at least once the organization passes ~100 people.

I would expect that to be the case for staff who truly support faculty. But many of them seem to be there to directly support students, rather than via faculty. The number of student mental health coordinators (and so on) you need doesn't scale with the number of faculty you have. The largest increase in this category is 'student services', which seems to be definitely of this nature.

Insightful and concrete in a way I rarely see on this subject; strong upvote.

The question I'm left with is "Who actually wants this?".  Do schools think they need every subject under the sun for legitimacy?  Schools clearly think this is a selling point based on how prominently student to faculty ratios and number of degree programs is advertized.  Do students just so consistently have no idea what they want to do or what they should pay for it (oh you can just change majors it'll be fine [not mentioned: at the cost of addtional years of schooling you'll have to pay for]), and are equiped with a support system that just lets them sleepwalk into crushing debt?

When I think of my own college experience, it was awesome the wide variety of classes I was able to take and not slow down my graduation or impede my CS major. Here are some of my favorites : 4 semesters of performance art, 3D sculpture, linguistics, constructed languages, scuba diving, skiing, tree-climbing, lesbian fiction, singing tutoring, computer graphics (wrote own raytracer), religion in the Middle Ages, history of film, judo, modern dance, Alexander Technique… I am sure there were more, I was ravenous through the course catalog. I graduated in 2013 fwiw. So, at least for me, it gave me a huge base of life experience and was extremely enjoyable to study so many subjects. And ended up with a job in tech that made the college cost a non-issue. I’d do it again and have already done it again - I spent two semesters doing more art classes at a local college after the startup I was working on was acquired

Professors likely prefer to teach smaller classes over teaching larger classes. Professors do like it when they are able to teach their pet subjects. If every professor teaches their pet subjects that likely results in every subject under the sun being taught.

In the 1980-81 catalogue, there were 2139 hits for “Ph.D.” and the catalogue was 239 pages, a ratio of 8.9. In the 2011-2013 catalogue, there were 4132 hits and the catalogue was 414 pages, a ratio of 10.0. So if anything, there are fewer professors per class - professors are teaching slightly more courses on average.

Isn't that backwards?  A higher "Ph.D."/catalogue page ratio would suggest a higher professor/class ratio, wouldn't it?  Still, as you say, it's only a small difference.

Good catch, thanks. Fixed.

The main theory we'll end up at, based on the accounting data, is that college costs are driven mainly by a large increase in diversity of courses available, which results in much lower student/faculty ratios, and correspondingly higher costs per student.

The "driven by" wording in the above suggests cause. It makes it sound to me like the increase in course diversity (and decrease in student-faculty ratios) comes first, and the increased cost is the result.

Is that what you meant?

If so, I think that case has not been demonstrated in the post. I'm with Eliezer that the extra money has to be spent somewhere. And while it's interesting to learn that it's spent on faculty and support staff (rather than e.g. research, or w/e), it's not at all clear to me that it tells us much about why the prices have gone up.

Fair point. I don't think the increase in course diversity was causal.

Ah, thanks for the clarification!

It's worth noting that the while number of courses at Berkeley almost doubled in the period shown, the number of courses per student has increased at a lower rate due to an increase in students. 

Eyeballing the graph and looking at Berkeley's enrollment numbers I think the number of courses per student has increased by around 50%. Smaller but still a big effect.

It would be worth defining the terms that are used. What's 'tuition revenue'?

OECD data suggests that the United States spends $26,000 per student per year on tertiary education. If the cost difference between tuition revenue of $15,000  and costs of $26,000 is $11,000, where is that money coming from? 

When looking at cost disease I think it makes sense to focus on the costs per student.

Regarding increased costs in healthcare…

I’ve worked in med device since 2008. The effort it takes to develop and commercialize med devices is continuously increasing and subsequently driving up costs. Many teams of engineers are paid well to generate binders full of documentation in support of the regulatory/compliance requirements of even simple devices. I’m sad to say that this increased effort doesn’t directly translate to better devices, but it certainly keeps a lot of people employed.

It seems relevant that class size is one of the factors used to generate the U.S. News & World Report college rankings – and among those factors, it's one of the easier ones to game (see, e.g., this report on how Columbia manipulated their ranking, summarized by Andrew Gelman here). I'd bet the trend towards more, smaller classes is driven at least in part by competition to keep up in the rankings.