A government's guide to getting started with pay for success (Urban Institute)

By Kimberly Walker, Urban Institute, Training and Technical Assistance Manager; and Rebecca TeKolste, Urban Institute, Project Associate

As an advisor to the mayor on health and human services, you have worked for years on a plan to increase maternal and child wellness outcomes for low-income families in your city. You’ve worked with local government leaders, nonprofits, parents, schools, hospitals, and city agencies to understand the fundamental causes of issues like pre-term births and repeated hospitalizations of young children. You’ve also looked at data from various administrative systems to try to pinpoint the high costs associated with these outcomes to make an additional business case for addressing these issues.

 Through this analysis, the need for a targeted intervention like Nurse-Family Partnership to serve the mothers and children is clear. You’ve approached the mayor several times about implementing this program across the city, but she repeatedly says there is no budget to invest in scaling the intervention, despite analysis that shows a potential for large savings over multiple sectors.

 You have found yourself in a dilemma faced by local governments all over the country, where evidence-based solutions can’t find their place because of legislative gridlock, funding shortfalls, and lack of ability to appropriate funding. What if there was a funding mechanism that could help change this scenario?

Why pay for success?

Pay for success (PFS), also known as social impact bonds (SIBs), is an innovative financing mechanism that shifts financial risk from a traditional funder—usually government—to a new investor who provides up-front capital to scale an evidence-based or innovative social program. If an independent evaluation shows that the program achieved agreed-upon outcomes, then the investment is repaid by the traditional funder; if not, the investor takes the loss. In our example above, PFS was appealing to the government aide because it shifted risk to new actors. Setting up a new program is risky for governments, both financially and politically. PFS shifts that risk to an outside funder and bypasses typical bureaucratic challenges.

 PFS also appeals to government agencies because it allows them to:

  • Pay for outcomes: With PFS, the government only pays for new programs if they meet agreed-upon results, shifting away from traditional outputs-focused funding that does not account for whether a program is working. This is a win for taxpayers, government officials, and the people the program serves.
  • Scale evidence-based policymaking:  PFS provides the upfront funding to scale programs with a strong evidence base quickly.

 First steps toward pay for success

Most existing PFS projects began with a formal feasibility study conducted by the state or local government. In the example at the beginning of this blog, the community carried out the following key step in assessing pay for success feasibility:

  • Use administrative data to identify which problems are particularly costly to your community. PFS is attractive to governments partially because of the potential for cashable savings. Identifying problems in which a gap in service delivery of inefficiency in service provision proves costly is an important step in the feasibility process.

 Additional steps toward assessing the feasibility of a pay for success project and whether deeper exploration is warranted would include:

  • Considering benefits other than those that come from cashable savings. As Jitinder Kohli, Megan Golden, Joe Coletti, and Luke Bo’sher discuss in their paper on pricing PFS outcomes, cashable savings should not be the only consideration when putting together a PFS project. Savings may be elusive at first or complicated to obtain. Public value and larger benefits to society should also be considered and combined with data to make a decision about which issue areas to pursue with a PFS project instead of another financing mechanism. To identify issues other communities have taken on as part of PFS projects, check out our project fact sheets.
  • Examining existing legislation and procurement processes at the state and local level. PFS is a new type of financing mechanism that many governments may not be prepared to support right away. Governments have created sinking funds, trust funds, and other mechanisms to appropriate outcome payments for these projects. Many have also used legislation to authorize a PFS pilot project or allow government agencies to enter into PFS deals. Interested parties should work with their legislators, their staff, and potentially legal experts to identify what the existing legislation allows and then work to craft new legislation if necessary.
  • Considering other possible funding options. PFS is oneway to finance evidence-based programs, but correctly matching PFS with an appropriate program and community is crucial to its success. PFS is not a solution in all cases, particularly those where the outcomes occur over a long time horizon or where cost savings are hard to estimate. Consider working with an intermediary or consulting organization that knows PFS well to do a formal feasibility assessment and discuss alternate financing mechanisms.

 Getting Help from Urban

The Urban Institute has resources designed for people that are looking for help in exploring, implementing, and evaluating PFS projects.

  • Reach out to our Support Center. Urban experts are standing by at our Support Center to answer your PFS questions and connect you with subject-matter experts on specific issue areas (e.g., homelessness) as needed. Reach us here or via Twitter @PFSSupport.
  • Respond to our next NoSA to receive more in-depth support. We expect to release a second Notice of Support Availability (NoSA) this summer. If your community could benefit from more intensive training or technical assistance support in exploring and implementing PFS, stay tuned and get ready to apply!

As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research.