Health Policy$ense

Can Social Impact Bonds Deliver For Health?

A New Way to Attract Private Investment in Public Goods and Social Programs

Social impact bonds (SIBs), also known as "pay for success financing," are a relatively new way to attract private investment in public goods and social programs. The potential to draw new revenue streams that can fund programs with significant upfront costs but long-term savings has made these bonds attractive in the health care sector.

LDI is soon hosting Harvard economist Jeff Liebman, whose work on social impact bonds has contributed to the debate about how they can be used to finance health care. What are SIBs and how might they be used to improve health?

Despite their name, SIBs are not bonds. First introduced in the United Kingdom in 2010, SIBs provide the government with private funding for a specific social program with a predetermined performance target. If the social service organization receiving the funding meets the predetermined goal, the government makes performance-based payments (consisting of repayments of the original capital invested plus risk-adjusted returns) to the investors. If the organization does not meet its goal, the government does not pay. This is a high-risk scheme for private investors, since they provide the upfront capital and absorb most of the risk.

As Liebman and colleagues explain, “SIBs offer an answer to a question all policy makers are facing in these difficult fiscal times: How do we keep innovating and investing in promising new solutions when we can’t even afford to pay for everything we are currently doing?” In a different piece, Liebman explains another benefit—the quality control and rigorous evaluations present in the SIB model can ensure that the government invests in the most efficacious social programs.

South Carolina is currently considering the use of SIBs to fund a new program intended to reduce the state’s high rate of premature births. This program, which showed success as a pilot, sends trained health professionals into the homes of poor, pregnant women before and after birth in hopes of creating healthier births and healthier children. With SIB funding, the program can scale up from a few hundred beneficiaries to 4,000. Fresno, California is also looking at SIBs to fund a project aimed at reducing hospitalizations and costs from childhood asthma. The program will provide preventive care for children with moderate to severe asthma who are on Medicaid.

The potential of SIBs to deliver for health care has people excited, but not everyone is so enthusiastic. In a NBER Working Paper, LDI’s Mark Pauly and Ashley Swanson analyze the assumptions about how SIBs could increase the likelihood of program success over what would happen under traditional for profit and nonprofit funding models. They conclude that SIBs contain familiar ingredients present in more standard financing arrangements. As they see it, SIBs may be advantageous if altruistic investors—with both financial and mission-driven interests at stake—become change agents who positively influence outcomes. Thus, they explain, the value of SIBs is context-dependent. They may have added value if an investor is willing and able to spur efficiency, and fairly ineffective if no effort is made.

Despite some successes, we need to know more about results before hailing SIBs as the future of government funding for innovative social programs, including health programs. However, if proven efficacious, SIBs are a promising tool for spurring innovation in a cash-strapped health care system.

We look forward to hearing more about this from Jeff Liebman on November 9th. Click here to register for the event.

[The authors thank Adrienne Moss for her corrections to an earlier vesion of this post.]