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A New Kind of Payment Mechanism Targeting Social Determinants of Health?

It’s been established that an effective way to manage an individual’s health is to address the root cause of health complications, known as social determinants of health (SDOH).  Unfortunately, interventions that address SDOH often exist outside the scope of the traditional healthcare payment system. 

There is a relatively new methodology that can be used to increase spending on SDOH while transparently enforcing accountability and outcomes. Social impact bonds, also known as  “pay-for-success” models, are multi-stakeholder performance-based contracts.

The five key stakeholders and their roles are as follows:

1) Service Provider:  Agrees to conduct a program designated to yield a future outcome that is valuable to the payer.  (Usually a nonprofit organization.)

2) Investor:  Provides up-front working capital for the service provider to channel toward the designated program.  In exchange, the investor will receive a “success payment” if the committed outcome is produced on schedule.

3) Payer:  Commits to pay the service provider a “success payment” when the specified outcome is produced.  (Usually a government agency.)

4) Intermediary Organization:  Facilitates the SIB contract, establishes payment and financing terms, and supervises the service provider’s program.

5) Independent Evaluator:  Determines if the committed outcome was achieved upon conclusion of the contracted period.

Once the outcome is confirmed, the payer’s “success payment” is administered to the intermediary to disperse to the investor.  However, if the outcome is not produced, the payer does not administer the “success payment,” the investor loses their investment, and the service provider loses credibility.  See Figure 1 for a visual representation of the process.

Figure 1: What is a Social Impact Bond?

Center for American Progress

Potential for Success

Originally established in Peterborough, United Kingdom in 2010 to address issues of rampant recidivism, over 60 renditions of this payment model have since been launched in over 15 countries around the world, as tracked by the Social Finance Organization.

In the last five years, the United States has launched 13 social impact bonds, raising over $120 million and touching 18,000 lives.  Programs address social determinants related to criminal justice, housing/homelessness, health, education and early years, and child/family welfare.

Although these financial mechanisms have only existed for a brief time, some key results have been noted:

  • Deliver meaningful outcomes for vulnerable populations
  • Establish partnerships, which pools resources, experiences and insights
  • Improve performance and adaptability
  • Investment instills more rigor and scrutiny to social programs
  • Work to establish best practices through data collection and measurement
  • Drive funding toward preventive programs and proactive interventions
  • By displacing risk away from government, creates space for innovation

In addition, outcomes payments to service providers can be substantial.  Some examples of SIB program impacts and outcomes are shown in Figure 2.

Figure 2: Example SIBs in United States

Social Finance Organization

Federal funding is growing

Additionally, SIBs have also led to bipartisan legislation in the United States, resulting in over $435 million for new SIB partnerships in 2016. The budget expands the use of outcome-focused grants that give states, local governments and tribes more scope and flexibility to innovate and adapt programs to local needs, in exchange for greater accountability for outcomes. The funding would authorize up to 10 new SIB Partnership Pilots for Disconnected Youth. The prospective programs aim to improve education, employment, and other key outcomes and build evidence about more effective ways to help vulnerable youth. 

Rikers Island as testing ground

The first social impact bond in the United States was established in 2011 on Rikers Island in New York City. More than 9,200 inmates between 16-18 years old received group therapy aimed at improving their moral reasoning by addressing their beliefs and thought processes, a method known as moral reconation therapy. 

Entirely financed with a $9.6 million loan from Goldman Sachs, New York City committed to remunerate the investment if recidivism rate decreased by at least 10 percent over four years.  Despite valiant intentions, preliminary reports revealed that the program was not producing the targeted results, causing Goldman Sachs to prematurely terminate the program. 

There are several key factors that may have contributed to this:

  • As the first initiative of its kind in the U.S., our society still needs to better understand the most effective approach to SIBs
  • The process needs stricter standardization processes in order to scale
  • Our society is not accustomed to cross-sector, multi-stakeholder partnerships, which yield challenges in communication, expectations, and operations
  • The name of the methodology “social impact bonds” may be confusing, as SIBs are not technically bonds, but rather are more equity-like tools that do not offer principal protection, as bonds generally do
  • It is challenging to design evidence-based programs into large-scale interventions and additionally create a corresponding outcomes evaluation system

Despite the turbulent start of social impact bonds in the United States, 12 additional SIBs have been implemented within the last few years, as noted and charted above. During this infancy stage, each partnership experience contributes to the body of knowledge surrounding social financing models. Considering the nontraditional and complex nature of the SIB model, trial and error of these programs is not only expected, but also essential to deeper comprehension of best practices.

Caitlin Breanne Smith, MPH, is a program consultant at Philips Wellcentive

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