Social impact bonds for public health programs

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Imagine a public health program that reduces the incidences of childhood asthma. Or imagine another one that assigns a home visiting nurse to women pregnant with their first child. Don’t stop there. Imagine another program that identifies children under six who are at-risk of abuse and another one that helps the mentally ill out of restrictive institutional settings and into meaningful community housing.

The more cynical among us who suffer from “compassion burnout” may say that there’s very little imaginative about the public health programs noted above that have been launched in states like California, New York, New Mexico, Oregon and South Carolina.

State governments have spent billions trying to solve these problems and have often failed miserably by any worthwhile empirical standard. As health care costs consume a larger share of state budgets, the current pay-whatever-it-costs of maintaining a safety net for the poor is no longer sustainable. What’s needed are the disruptive technologies that have given us Uber, Amazon, Skype, Google, LinkedIn, or what venture capitalists identify as a gale force that has unleashed “the dynamics of deflationary economics.” If the cost of a video call on Skype is mere pennies why can’t we put a dent in medical care for the poor? If Google’s embedded tech – searches, maps and YouTube – increase production efficiencies, why can’t we design a prevention program to fight obesity?

The sharp venture capitalists that have made it big betting on Amazon and Apple have recast themselves as social entrepreneurs who think they can succeed where government has failed. They are not turning to politically-charged reforms such as privatization but rather to a new paradigm based on the idea of social impact bonds. An idea first developed in Great Britain and brought across the Atlantic by nonprofits such as the Boston-based Social Finance, social innovators are re-writing the financial architecture to help solve society’s intractable problems.

Social Impact Bonds (or “pay for success” models) engage private investors to fund social and public health programs. The state takes no risk and puts up no upfront funding. After pulling enough investors together, an intermediary like Social Finance designs the program, attracts the investors, hires the providers and provides the in-house metrics to gauge success. Investors are repaid (along with a modest return) only if specific outcomes are met, i.e. fewer asthma cases or newborns without follow-up care. The state makes those payments thanks to the savings. Effective outcomes are compared to a control group (or an existing state program). Much of the work thus far, including a trailblazing one initiated by the Commonwealth in 2014 centers around curbing the recidivism rate. (Another award seeks to curb homelessness in the Bay State.) Clearly, social innovation is expanding its domain.

The benchmarks used by social innovators are serious because —despite the billions spent— few state-run programs actually pass any cost-benefit analysis. Promoters of social impact bonds often design their programs on the gold-standard, the Coalition of Evidence-Based Policy’s “Social Programs that Work,” a slim compilation of vigorously studied programs.

And, private investors aren’t shy about the risks; the chances for a taxpayer bail-out should be zero. In 2012, Goldman Sachs lost $7.2 million when its project failed to reduce teenage recidivism in New York by the agreed-upon 10 percent threshold. Hard as they may fall, failures are the mother’s milk of an entrepreneur. According to the Rockefeller Foundation, there are currently 17 state and local governments using Social Impact Bonds and the potential could draw from $1 trillion in reserves in 10 years.

The social entrepreneurs think public health is ready for a dose of private sector risk-taking. How successful will they be? The Nobel Laureate Kenneth Arrow famously remarked that there cannot be a free market in health care though some beg to disagree. The call for more private sector ingenuity is appropriate in a world where Medicaid outcomes for the needy are inferior.

Most of the social innovation programs in public health thus far are infinitesimally small and the evidence is slowly accumulating. This past February South Carolina Governor Nikki Haley announced a $30 million expansion of the Nurse-Family Partnership program that pairs nurses with mothers and nurses for babies under two years. The state has long faced a grim high infant mortality rate and the “pay for success” model will enable another 3,200 mothers to get help. The program is expensive at $4,800 per household but estimates suggest that long-term savings from the nursing visits are worth four times that much. The expense is an investment that funders like the Duke Endowment, Blue Cross Blue Shield, Boeing and others are willing to make. It’s too early to tell whether South Carolina’s project is successful or even replicable but a journey begins with a small step.

California’s ambitious but small-sized plan to prevent childhood asthma in Fresno is showing preliminary signs of success. Surveys suggest that hospitalizations dropped by 70 percent and emergency room visits declined by 80 percent. The program offers families vacuum cleaners with special filters, hypoallergenic pillow cases, humidity tracking machines as well as offering housekeeping advice. Other states have also launched their “pay for performance” programs including Connecticut (for substance abuse) and Oregon (preventive health).

Can these modest experiments scale up to curb health care inflation? Will they ever be disruptive enough? Can they get the poor to see primary care physicians before turning to emergency rooms first? The Commonwealth of Massachusetts expects to spend nearly $600 million on public health programs in the next fiscal year. Taking some of that money for experimentation should be welcome.

There are lot of wrinkles in the social impact model and worries about complexity and accountability are to be taken seriously. Clearly, the delivery system needs a shock —something like the welfare reform act of 1996 to reframe collective thinking about social and health care policy.

Given the enormity of the challenges, social impact bonds and pay for success models may be an infant industry worth nurturing.

Frank Conte is director of communications at the Beacon Hill Institute at Suffolk University where he also serves as project manager for the annual State Competitiveness Report and Index. Read his past columns here.