Paying for Results: Making the Case for Funding 'Pay for Success' Initiatives | Industry Perspective (Government Technology)

BY GARY GLICKMAN AND DOUGLAS BESHAROV

Pay for success financing (PFS), often part of a social impact bond, is a new concept in which private investment supports the delivery of preventive services that save the government money —  and those savings are used to repay the investment.

PFS is attractive because it has the potential to finance innovative evidence-based services while ensuring that taxpayer dollars will only be spent once the desired outcomes have been achieved. This article draws an important distinction between financing (raising capital) and funding (paying for results), and discusses the funding implications for government leaders.

Any government organization considering funding a PFS project must answer the questions of how to define savings and how to capture them. Financing, in terms of external investment, can only occur after these questions have been answered.

DEFINING SAVINGS

There are generally three ways to think about savings in the context of PFS:

1. Budgetary savings: A reduction from costs that would have been incurred in the program's absence. These savings typically stem from reductions in anticipated spending from uncapped program accounts.

2. Productivity savings: A reduction in the costs of capped programs in which there may be a waiting list or insufficient funds to serve the entire population. In this case, reducing the cost per outcome allows more people to be served using the same level of funding.

3. Social or long-term benefits: Benefits created from a re-oriented system, typically appearing five to 10 years after the PFS program.

CAPTURING SAVINGS

Making the calculation more complex is the fact that savings may accrue to agencies and/or programs within or across levels of government. Shaun Donovan, director of the U.S. Office of Management and Budget and former secretary of the Department of Housing and Urban Development, referred to this as the “wrong pockets” problem.    

An investment made by one agency can yield savings in another. Consider a county government that reduces homelessness and thus reduces emergency room visits. The costs are borne by the county, while the savings accrue to the Medicaid program at the state and federal levels, or perhaps to a third-party provider.

While there are several potential solutions to such situations, most of them depend on accessing savings from the entity to which they accrue — but sometimes that is constrained by regulation or law.

“SET ASIDE AND HOLD” PROBLEM

PFS contracts are usually long-term agreements in which agencies commit to making a payment at a future date, once certain outcomes have been achieved. However, most state and local governments are unable to commit future resources (as opposed to current resources to be paid out in the future) without specific budgetary authority.

This situation raises questions around how sufficient funds can be set aside to pay for the results when they occur — without being counted as current obligations. Investors may well be unwilling to come to the table if a risk of funds not being available exists. Or, at a minimum, they will expect to be compensated for this risk through an increased rate of return. Also, state law may not allow agencies to enter into a contract that is not fully funded.

Some states have addressed this risk — usually known as “appropriation risk” — by setting aside funds on an annual basis; others have passed legislation to either establish a fund or the availability of funds once targeted results have been achieved.

In this complex environment, funding for PFS programs can come from three areas:

1. Out of current revenues. Because one legislature usually cannot bind the budgetary actions of another, investors would have to rely on the commitment of successive legislatures throughout the term of the deal.

2. From the costs avoided as a result of the program. The government would need to set up a mechanism to capture the avoided costs and make them available to pay the investors.

3. Through a dedicated fund. This could be funded from a) bond proceeds; b) deposits of captured avoided costs; or c) annual deposits from general revenues.

Public-private partnership authority or bonding authorities are potential models to inform this discussion.

MEASURING RESULTS

Since PFS transactions came into the market three years ago, randomized control trials (RCTs) have been considered the “gold standard” by which all deals should be evaluated. All other things being equal, RCTs are the most likely evaluation methodology to achieve strong causal validity; that is, they are best at determining the extent to which causality can be established between the intervention and the outcome (and/or impact) of interest.

Historically, RCTs have been time consuming and costly due to the need to collect supporting data, often through extensive surveys. However, an emerging trend is to use large administrative data sets — data that is collected for program administration or other operational purposes — to significantly lower the cost and improve the timeliness of low-cost RCTs. These low-cost RCTs provide a strong method for evaluation, while allowing for more widespread use, more transparency and the introduction of rapid cycle evaluations that can facilitate feedback for improved performance management. Low-cost RCTs address the cost barrier of traditional randomized trials by performing the assessment on existing programs, and evaluating outcomes with administrative data already in collection for the intervention.

RISK AND REWARD

The return on the investment needs to be balanced against the risk taken and savings achieved. If the risk of failure is small, the government may not be willing to pay a premium for the program goals being successfully achieved. If the risk of failure is great, a nongovernmental entity may not be willing to assume the risk without the promise of a large reward. In most PFS projects, philanthropic capital has played an important role to limit other investor risk.

While funding PFS initiatives raises both challenges and opportunities, the extraordinary growth of PFS reflects increasing realization of its underlying promise — a promise rooted in the focus on government paying for real results and addressing critical social problems in innovative ways.

By Gary Glickman of Accenture Health & Public Service, and Douglas Besharov, a Norman and Florence Brody Professor at the University of MarylandSchool of Public Policy. A prior version of this article was published in Policy & Practice, a journal of the American Public Human Services Association. It is excerpted from “A Focus on Results,” a report available at www.accenture.com/PayForSuccess.