« State v. Dharun Ravi: The Appeal | Main | The Possible Relationship Between Course Design and the Curve »

Wednesday, September 14, 2016

Involuntary collegiate "do not resuscitate" orders

In an earlier post, I sought to analogize from Enron's collapse to the recent failure of ITT Tech, a for-profit chain of colleges. I highlighted a number of similarities, including that both were former darlings of Wall Street and both were accused of fraud. I then pointed out that Enron sought to reorganize some of its operations in a chapter 11 bankruptcy proceeding but that there is virtually no chance that ITT Tech will attempt something similar. The reason I suggested that reorganization was off-the-table for ITT Tech is because colleges and universities immediately and permanently lose access to Title IV funds (the federal student loan and grant programs) if they file for bankruptcy. So, while legally possible for a college to seek to reorganize, most colleges would find it is practically impossible to do so (Morris Brown, notwithstanding).

One commenter noted that my earlier post suggested that the common link between Enron and ITT Tech was fraud, but that I had ignored the major difference between the two entities: the sources of capital available to each entity. While Enron's ability to reorganize depended on the availability of private capital, ITT Tech's ability to reorganize was doomed only because federal student financial aid would no longer be available. The question was thus implicitly posed: why should ITT Tech (and other financially distressed, for-profit college chains) continue to enjoy access to federal support?

I had focused on the fraud link between Enron and ITT Tech because concerns about "unscrupulous profiteers and their fraudulent schools" appears to have driven Congress' decision to sever a college's access to Title IV if it files for bankruptcy. But I agree with the earlier commenter that concerns about fraud simply cannot explain the difference in treatment. For various reasons I'd be glad to explore separately (let me know in the comments!), bankruptcy court oversight would seem to make further fraud less rather than more likely. But I soon also realized that access to federal support cannot explain the difference either.

In my current project, I compare the treatment of financially distressed health care providers to that of financially distressed higher education providers. There are "striking" similarities between the two industries. Both industries involve an unusual mix of for-profit, private nonprofit and public enterprises. In addition, both industries are under tremendous strain, with many hospitals, nursing homes, colleges and universities expected to shut down in coming years. And, most importantly, federal support is the dominant source of revenue in both industries. Yet colleges lose access to Title IV funds if they file for bankruptcy but health care enterprises retain access to Medicare and Medicaid. Any thoughts on why this should be?

The thesis of my new project is that Congress simply botched things by cutting off Title IV access for bankrupt colleges while preserving it for virtually every other type of entity, including bankrupt health care enterprises. I believe that preventing colleges from reorganizing is a mistake because bankruptcy’s reorganization provisions were designed to increase social welfare by allowing distressed enterprises to return to viability despite their past mistakes. Bankruptcy reorganization is a critical tool for addressing financial distress, and should be available to all distressed entities, including colleges and universities. In a future post, I intend to explore how bankruptcy reorganization works to provide something akin to financial life support for down-and-out enterprises. Until then, I welcome your comments.


Posted by Matthew Bruckner on September 14, 2016 at 09:39 AM | Permalink


Upon further reflection, I think it bears noting that some estimate that as much as $70 billion per year is lost to fraud, waste and abuse in the healthcare system. By comparison, the federal government's entire contribution to subsidizing higher education is estimated to be around $76 billion per year. Therefore, even if price controls in Medicare/Medicaid decrease the amount of waste/abuse/fraud and the lack thereof contributes to significant cost inflation in higher education, the relative size of these two industries makes the problem much more acute in the healthcare context.

Posted by: Matthew Bruckner | Sep 30, 2016 11:40:22 AM

I agree with your views on gainful employment rules. Frankly, it's not clear to me why only for-profit colleges should produce gainfully employed students. If nonprofit colleges are graduating students who are unemployable, it seems there is likely to be an issue with the nonprofit college too.

I also agree with you that ITT Tech and Corinithian may have failed to reorganize, even with continued access to Title IV funds. I get up on my soapbox to decry the lack of opportunity for colleges to reorganize. But, like most for-profit businesses that seek to reorganize under chapter 11, I assume that most colleges' reorganization plans would fail for one reason or another. As you know, chapter 11 can be used to address financial problems (e.g., debt overhang) but cannot create demand for products where that demand doesn't otherwise exist.

As for caps on PLUS loans, I'll note that there is a fascinating literature on cost cutting v. cost shifting in the healthcare context. When a public payer (e.g., Medicare) cuts reimbursement rates, can hospitals charge private payers (e.g., insurance plans) more? Or do cuts in Medicare reimbursements force hospitals to either cut fat (perhaps also lowering the amount hospitals need to charge private payers to earn a profit) or to reduce their volume of services? See, e.g., http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3160596/. In any case, I'd love to read some additional empirical research on the effects of reducing public higher education spending on the overall cost of higher education. see, e.g., http://www.acenet.edu/the-presidency/columns-and-features/Pages/Myth-Increases-in-Federal-Student-Aid-Drive-Increases-in-Tuition.aspx

Posted by: Matthew Bruckner | Sep 15, 2016 2:10:46 PM

I shudder at the thought of "more regulation" in the abstract, and I think we already see over-regulation to some degree in higher ed--at least among some of the state schools, where legislators and state officials make some really ill-informed choices (like blindly assuming "more STEM!" will solve everything) and occasionally micromanaging everything from guns in the classroom to tenure standards. But if the regulation takes the form of conditional spending, then I think it could do some good. (And maybe there's another analogy to be made with NFIB v. Sebelius in the ACA context...) I'm a fan of the "gainful employment" rules and would like to see them extended beyond the for-profit sector. I see the university's reliance on federal Title IV monies as being much more significant than the non-profit or for-profit charter. If those funds make up greater than, say, 50% (or more, or less--but some large fraction) of the institution's budget, then I think it would be reasonable to hold the institution to the gainful employment rule. I'd also like to see some hard caps on GradPlus and Parent Plus loans. I suspect that even with continued access to Title IV funds, ITT and Corinthian wouldn't have been able to effectively restructure as long as the gainful employment rules were in force. But it probably could have made a difference to Lon Morris, some of the HBCUs that have struggled financially, or a liberal arts college like Sweet Briar (which seems to be doing better now--again, suggesting that in some cases a little financial breathing room is enough to improve and adapt to the modern educational marketplace). The schools who couldn't survive the gainful employment rules seem to be much more about effectively milking students for the Title IV money without giving back much in educational value (and I think there are probably law schools that fit this category as well).

Posted by: CBR | Sep 15, 2016 1:51:19 PM

Wonderful comment, Andra! Thank you for it. It has really provoked my thinking and I will think about how best to address it in the paper (or a future blog post).

Do you have any views about whether we should see greater regulation in the higher education market? There are certainly lots of calls for greater substantive regulation of, among other enterprises, law schools. Schools would, I think, resist fiercely because very few anticipate needing bankruptcy protection and so would view more substantive regulation as all stick and no carrot.

Posted by: Matthew Bruckner | Sep 14, 2016 9:05:27 PM

I think this is a really interesting comparison! One difference that I see is a much greater governmental involvement in price controls in Medicare/Medicaid than in higher education. It seems to me that it's something of a tradeoff--if we allow universities to continue to access federal funds to reorganize, then there have to be some price controls in place to avoid abuse and self-dealing. The combination of market-based pricing with government financing creates the conditions for significant cost inflation beyond what you'd see in either a pure market-based system or a more strongly regulated one.

Posted by: CBR | Sep 14, 2016 3:26:34 PM

Post a comment