To Slow The Relentless Rise In Health Costs, A Small City Tests A New Kind Of Investment | Fast Company

By Ben Schiller

As it battles with high asthma rates, Fresno, California will become the first city to try to use social impact bonds to create better health.

One reason health care costs keep rising is that the system tends to pay for the consequences of ill-health, rather than trying to make people healthier before they get sick. Prevention is frequently effective and often cheaper. And yet the lion's share of spending still goes to hospitals and ER units.

This situation does create opportunity, though. If someone comes in with money for earlier, preventative interventions, it should be possible to pay for them with the money saved at a later date. That, very roughly, is what a social impact bond tries to do. It's an investment in prevention that pays for itself in savings.

This provides an opportunity to see how social impact bonds can scale these interventions to the large number of children.

That's the theory anyway. Nobody has set up a social impact bond for health yet, though there's plenty of interest in trying, and social impact bonds are now used in other areas. For example, New York City has a contract with Goldman Sachs to reduce the rate of re-offenders at Rikers Island prison. And Massachusetts is doing something similar.

Fresno, California, may see the first social impact bond for health. Several groups are now laying the groundwork there for a bond that would seek to cut asthma-related health care costs by improving at-home management of the disease. Social Finance, a Massachusetts nonprofit that facilitates impact investing, is now recruiting 200 low-income children for an in-depth trial. If the demonstration reduces ER visits by at least 30% and hospitalizations by 50%, the scheme will launch in mid-2015, assuming they can arrange funding.California Endowment, a health care foundation, is paying $660,000 grant for the pilot.

The groups chose Fresno because its asthma rate for children, at 20%, is double the national average and related costs are high. Every day, at least 20 asthma sufferers end up in the ER and three are taken to hospital, at a total cost of $35 million a year. The pilot will test inventions proposed by the Centers for Disease Control, including reducing dust mites, cigarette smoke, and other contaminants in homes.

"Unfortunately a lot of these in-home asthma management programs are not paid for through the traditional payer systems," says Nirav Shah, at Social Finance. "That provides an opportunity to see how social impact bonds can scale these interventions to the large number of children in Fresno who have asthma."

He thinks the full program, if it goes ahead, could last one year, and have a payback period of three to five years. But it's too early to say exactly. The point of the demonstration project is to assess what the target should be both in reducing costs and improving health, and what returns any bond could pay. That's, of course, the tricky part.

Nationally, asthma generates medical costs of $50 billion a year. But it's far from the only disease that might be suitable for a pay-for-success model. Shah also thinks prevention related to diabetes, hypertension, and maternal health could all be worth considering.

"There is an immense opportunity to scale up programs that have a known impact on health but aren't funded by government or the payer system," he says. "The question is how can we move [health care] delivery upstream towards prevention."

Ben Schiller is a New York-based staff writer for Co.Exist, and also contributes to the FT and Yale e360. He used to edit a European management magazine, and worked as a reporter in San Francisco, Prague and Brussels