On behalf of Social Finance, I applaud Congressmen Young and Delaney’s and Senators Bennet and Hatch’s leadership and support for the Pay for Success market through the Social Impact Partnerships to Pay for Results Act H.R. 5170.
The federal government plays a catalytic role in advancing initiatives by innovative state and local governments and we commend its bipartisan leadership and focus on promoting innovative, outcomes-focused policy. As practitioners, we witness firsthand how Pay for Success projects can be used to measurably improve the lives of people most in need by driving resources toward better, more effective programs.
H.R. 5170 would promote and support the use of Pay for Success by state and local governments by enabling federal funds to address community-identified needs using interventions that are effective, evaluated, and provide value to taxpayers. It would incentivize the more efficient use of government resources to reward what works.
As you appreciate, government spends hundreds of billions of dollars each year on necessary human services, but for the most part, does not measure the outcomes of those programs. Government also focuses the bulk of its appropriations on tackling existing problems instead of investing in upstream, preventative interventions that set people up for long-term success.
Pay for Success represents one tool for governments to tackle current social challenges, such as reducing recidivism as part of the growing effort to reduce incarceration rates, confronting chronic homelessness to lower the number of people living on the streets, and boosting early education efforts to help narrow the widening achievement gap. It allows philanthropy and impact investors to leverage their financial support to expand access to high-impact interventions. It also drives innovation by service providers to most effectively respond to our most critical social needs and our most vulnerable citizens.
Pay for Success projects combine nonprofit expertise, private funding and rigorous evaluation to transform how government leaders respond to chronic social problems. Funders provide upfront capital to expand effective social services and governmental entities pay for all or part of the program only if it measurably improves the lives of participants. Independent evaluators measure the effects of a program based on specific, predetermined metrics that benefit both individuals and society and generate value for taxpayers.
Take, for example, Social Finance’s work on the South Carolina Nurse-Family Partnership (NFP) Pay for Success project. This initiative, which was announced by Governor Nikki Haley in February 2016, will bring NFP’s evidence-based program to 3,200 first-time mothers and their babies across South Carolina over the next six years, more than doubling the 1,200 families currently benefiting from this high-impact intervention.
More than 280,000 South Carolina children — or about 27 percent — live in families struggling with poverty. Half of the babies in South Carolina are born to low-income mothers who qualify for public health insurance programs. Young mothers living in poverty are at greater risk for poor birth outcomes including delivering premature babies. Growing up in poverty can be harmful to a child’s cognitive development, health, school performance, and social and emotional well-being.
NFP pairs vulnerable first-time mothers with registered nurses who have specialized training in maternal and child health. Through home visits from early in pregnancy to the child’s second birthday, the nurses support mothers in having healthy pregnancies, becoming knowledgeable and responsible parents and giving their babies the best possible start in life. By strengthening families and improving early childhood development, NFP helps break multi-generational poverty.
This example highlights an important feature of Pay for Success: it holds a unique position in the growing impact investment landscape. While there is a lot of attention in impact investing given to profit-driven social enterprises, Pay for Success mobilizes capital primarily for nonprofits like NFP—classic human-service organizations that have long survived by scrapping together donations in annual development drives, securing government contracts, or both to keep the doors open and services running.
By enabling these organizations to access upfront, patient, and flexible capital, Pay for Success builds a pathway to scale for an entire sector doing incredible work that has been historically overlooked by the capital markets. Additionally, in a Pay for Success project, there is a direct connection between every project stakeholder and tangible human impact. Success is measured based on the life outcomes of individuals—healthy births, employment gained, stable housing—and these life improvements are the source of financial returns.
Against this backdrop, increased federal participation could mark an inflection point, spurring growth for Pay for Success and for the services it supports. This legislation would help solve the so-called “wrong pockets” problem, in which the value of a given program is dispersed across different levels of government, stalling funding even for programs with proven effectiveness. For example, if a particular state agency is expected to bear the brunt of the costs of a preventative program, but sees little benefit in their budget’s bottom line, there is little incentive to implement that program. Any social issue where a federal program pays for services, such as Medicaid, will require a federal commitment to pay for outcomes when savings and value are realized.
Social Finance’s work with NFP in South Carolina led the state to apply for a waiver from the Centers for Medicare & Medicaid Services (CMS) to access the federal portion of Medicaid funding—in essence solving the “wrong pockets” problem that the project would have otherwise encountered. This legislation would streamline the process of solving this challenge for projects throughout the country.
We believe Pay for Success holds tremendous potential to address some of our most pressing social issues, and we believe that government can and should be more innovative in its approach to solving society’s greatest challenges. Passage of the Social Impact Partnerships to Pay for Results Act H.R. 5170 is an important step towards that goal.
CEO and Co-Founder, Social Finance
Co-Chair, US Impact Investment Alliance