Technology Companies and Cost Reduction in Critical Sectors

Levers for tech companies to reduce costs in housing, education, and healthcare.

One of the most fundamental long-term drivers of dysfunction in any society is a decreasing likelihood of achieving what is considered a basic standard of economic consumption at that time and context. Put more precisely - the ability of sizable sectors of the population to access essential goods and services for their survival. From the European Revolutions of 1848 to the loss of Mandates of Heaven in imperial China, difficulty in the populace achieving some economic standard for their survival, whether it be rising costs of staples alongside urbanization or mass famine among the peasantry, has been a consistent major factor that has often been ignited by some catalyst to spark massive and sometimes fundamental (and/or disastrous) shifts in social organization.

In contemporary American society, the most clear and alarming trends in unaffordability are seen in housing, education, and healthcare (although housing has, according to the below figure, increased less than wages, though this sector likely varies more than the others based on region and setting). These sectors are notorious in their stagnation, their unaffordability, and their essentialness to American life. Moreover, they can also be considered the practical underpinnings needed for the economic conditions for social mobility, perhaps the key component of the American promise. For the last couple decades, costs in these sectors in particular have climbed dramatically and consistently relative to wages, alongside declining relative costs in almost everything else, creating a massive discrepancy in affordability between essential goods and everything else. 

Source: American Enterprise Institute

There’s probably a convincing argument to be made that almost every major societal friction in the United States today stems from this trend in unaffordability (though I’m not going to make it here as it is not the focus of this essay). With that reasoning, this trend is a root problem to tackle and doing so will have compounding effects in addressing almost every other issue of consequence we face today and mitigating risks for the future. So what are we going to do about it?

The answer to that question starts with what we have tried to do about it. In addition to skyrocketing costs relative to wages, these sectors are also characterized by high levels of government involvement. I would, as many have, posit that these two characteristics have a causal relationship. Government subsidies in these sectors have created warped incentive structures to the detriment of the consumer, with different payers and end users, resulting in bloated, bureaucratic, and most importantly, high cost industries. Much has been written about the warped market conditions and bloated costs created by government involvement in these sectors, so I won’t spend too much time delving into the details here. The core takeaway is that high levels of government intervention have not led to, and also actively prevent, increased affordability in the essential sectors of housing, education, and healthcare. 

What government involvement does get right, however, is that action to address these problems has to be taken by institutions. I believe the group of institutions in the US today with the most leverage and opportunity to address this long-term state of affairs are high-growth technology companies (and yes, tech companies are societal institutions). 

At a most fundamental, definitional level, ‘technology’ is about cost-reduction, distinguishing it from basic research. This cost reduction can happen in a variety of ways. In particular, there is the canonical economics definition of technology, essentially boiling down to advances that enable doing more with less. A second avenue for cost reduction that is particularly prevalent in software products is the reduction of bureaucracy and complex procedures that drive up costs, which are ultimately passed on to the end user. This method of cost reduction is also doing more with less, but the less is a procedural change rather than a substantive one. 

Moreover, technology companies are institutions, and institutions of great consequence at that. The scale and potential of many of these organizations puts them as a group on a similar level to other centers of societal power - the state, the church, civil society, and so on. They are also some of the most trusted and competent institutions in the US today. Amazon is the second most trusted institution in the country after only the military, ahead of a number of other government institutions, according to a survey by the Harris Poll and Harvard’s Center for American Political Studies. Flexport’s Ryan Petersen took to Twitter to make concrete recommendations for reducing the congestion at Long Beach and LA ports, and saw some changes implemented by local government shortly thereafter. Curative rapidly scaled testing and later vaccination distribution in the early phases of the pandemic. Further examples abound of companies functioning as high competency institutions. Furthermore, the macro, decades long shift of talent from the public sector to the private sector - first to finance, then big tech, and now high-growth startups - necessitates that these companies function as institutions (I’ve written more about this shift here). Institutions are ultimately composed of people, and a major input in their effectiveness is the talent they are able to attract and retain. With technology companies having the most effective talent pipeline of any group of organizations in the US, it’s critical that private technology companies function to reduce cost to consumers in these critical sectors. The greatest limitation to these companies solving these issues is around system-wide realignments of incentives, where they have a part to play in macro changes that involve other stakeholders as well; these companies, particularly startups, can, however, act as a forcing function to break through entrenched arrangements and the misaligned states of affairs. 

In examining how tech companies reduce costs across housing, education, and healthcare, a few themes emerge. These companies reduce cost primarily via the the following mechanisms:

• Advances in science and engineering that make the cost to produce these goods and services cheaper by orders of magnitude. 

• Reducing the costs of administrative burden and complex bureaucratic systems that drive up costs to the consumer. Similarly, helping consumers navigate complexity and maximize the value they get out of these systems.

• Reducing cost to provision at scale, by developing new and more scalable ways of both production and distribution. 

• Tech-enabled business models that reduce cost to the consumer, such as new forms of financial services to improve affordability in these sectors. 

In the grand scheme of things, I see the role of technology companies in reducing costs for these sectors in some way as a critical step to achieving the Abundance Agenda, described by Derek Thompson here. We know tech as a sector is comparatively competent. We know there are massive amounts of capital being deployed in private technology markets, and we know these companies can attract world-class talent. The ingredients for major progress in the national interest are all there, and it’s only dependent on the focus and determination of teams willing to work on these hard sectors. 

Let’s take a look at some of the companies affecting cost reduction in some form across housing, education, and healthcare, and how the levers they are pulling to do so. A note on an important distinction here - I focus here on both reducing costs to the consumer, as well as the more fundamental but challenging cost reduction of reducing costs overall (i.e. how much that good costs). 

Housing 

In housing, we see companies affecting cost reduction in a number of ways. First, there are companies focusing on density, whether through the provision of ADUs or software products that enable easier pathways to and management of high-density living arrangements. Secondly, there are a number of companies focusing on cheaper and more scalable methods of construction, including pre-fab units (e.g. Cover) or 3D printing construction methods (e.g. Icon). Additionally, other companies, such as HighArc or Mosaic, are focused on software products that automate or otherwise reduce costs in management and administrative procedures in the construction process.

There are a number of other companies working on the more consumer or investor-facing aspects of financing homes, both through focusing on rentals (e.g. PadSplit) and ways of investing (e.g. United Dwelling, Fundrise). Finally, although homeownership is only one aspect of addressing housing affordability challenges, there are also a number of companies working on making homeownership more accessible and tackling the housing affordability space from a homeownership angle (e.g. Landed, Landis, rent-to-own companies)

This essay by Daniel Wu from 2017 takes a much closer look at different ways startups can move the needle on housing affordability. 

Education

In education, the two main levers of cost reduction are around unlocking more favorable education financing and alternative models of education distribution. It’s important to note that for all the talk of the end of higher education and the unbundling of college, there has yet to be a silver bullet solution or clear competitor to the status quo.  As such, the major levers companies have for cost reduction are around the reduction of administrative burden and unlocking education financing, as well as businesses built around the provision of alternative tech-enabled curriculums. 

The first lever for reducing cost to consumers in higher education is to unlock all available financing - particular forms of non-loan financing - and drastically reduce the administrative complexity experienced by students. This approach is exhibited by companies like Mos, which effectively functions as a new financial service around unlocking access to the most favorable forms of education financing with minimal friction (disclaimer: I work at Mos and believe strongly in our team and this approach!).

Another related approach around unlocking financing focuses on scaling the methods by which and places where student loan debt can be repaid - effectively growing the repayment infrastructure to enable new ways for borrowers to pay off their loans. These companies include Rightfoot, Payitoff, and Goodly, which enable other businesses to offer loan repayment-related services either to end users or, in Goodly’s case, employees. Finally, the proliferation of ISAs as an incentive aligned education financing option, often focused on specific trades with forecastable financial return, also functions to unlock more affordable education financing options for certain types of programs where it makes sense. The technology solution here can be around both underwriting and distribution. 

The second major avenue for cost reduction in education enabled by tech companies is the provision of curriculum and other services in more scalable or lower cost formats, while maintaining curriculum quality. These services include curriculum providers like 2U, Noodle, and Outlier. While these services may, in theory, make the curriculum component of education more scalable both in terms of production and distribution, the biggest limitation here in the context of cost reduction is how these savings can get passed on to the consumer (i.e. students). The incentive structure of higher education financing in the US is currently such that it is difficult to create savings and even more difficult to pass those savings on to students, as the incentive-aligned outcome is for costs to continuously rise. 

Healthcare

Healthcare costs may be the most complex of the three sectors discussed here. I will preface this section with a disclaimer - healthcare and healthcare financing are really not at all my areas of expertise, and this overview will be a very surface level discussion of an incredibly complex space. Broadly, the levers of cost reduction by tech companies I will focus on are navigating benefits, tech-enabled financing, lower cost care provision, and lowering costs in ancillary systems in the industry. I focus less here on frontier advances in healthcare technology that reduce the costs of services altogether.

Some software products enable patients to better navigate benefits and providers for lower costs and/or better care and outcomes. Startups like Chapter and Healthjoy help patients navigate Medicare benefits and employee benefits, respectively. Additionally, some companies focus on reducing the administrative burden of benefit provision, such as Collective Health for employee healthcare programs.

Another category of company is focused on tech-enabled forms of healthcare financing, particularly around medical debt. These startups, like Walnut, focus on underwriting and distribution of more manageable healthcare financing models for the patient. There is also a fair amount of whitespace here for tools and services that help patients fight medical debt - similar to consumer protection products like DoNotPay.

Maybe the highest potential avenue for cost reduction in healthcare is around care provision itself - provision of tailored quality care at lower costs for patients in varied situations. Tech companies focused on this space include tech-enabled primary care clinics without subscriptions (Carbon Health); virtual care models that focus on proactive and preventative care (Maven); and community-based care for Medicaid plans (Waymark). 

Finally, there are a number of technology companies focused on moving the needle for cost reduction in ancillary components of the healthcare system. These include companies focused on new models for medical logistics, such as Zipline or Roundtrip. As with both housing and education, reducing administrative burden can be a lever for cost reduction in some component of a system; as an example, companies like Medallion are working to modernize the medical licensing and credentialing system. Finally, there are a number of technology companies working on making the financial stack of healthcare more efficient; the components of this stack include pricing (Cerebral), billing (Cedar, Peachy), and payments (Vim). Improving this finance stack may have the potential to, at minimum, improve the experience of healthcare costs for the consumer, if not reduce costs associated with financial operations in the industry that may be passed to the consumer (though the pathways by which savings in healthcare get passed on to patients is incredibly complex and somewhat opaque). 

Final Notes

I’ll conclude with a final note on optimism. These sectors are notoriously difficult and complex, and yet there is so much that is critically important to build here. Many will look at sectors like housing, education, and healthcare, with their entrenched interests, comparatively long time horizons, and massive amounts of complex government regulation at all levels, and choose to disengage, believing it’s not worth the effort to fix and throwing their hands up in exasperation. Here’s to the founders and teams that see all these broken systems and choose to dive in headfirst anyway, committing to solve these problems no matter how hard. The magic of tech as an industry - and of Silicon Valley as a mindset - is the optimism necessary to push at the status quo and build when it’s hard. That mindset is sorely needed in these long broken industries, and I find the founders and teams dedicating their time, talents, and energy towards addressing the problems in these critical sectors to be a reason for optimism.