with Dennis Price
The US government is again in the pay-for-success business. Slipped into the continuing resolution passed by Congress and signed by President Trump last week is $100 million to be distributed to states and localities for programs that deliver higher rates of youth employment and high school graduation and lower rates of asthma, diabetes, homelessness and recidivism among juvenile offenders.
“Progress,” declared Antony Bugg-Levine, CEO of the Nonprofit Finance Fund. “A range of people have been working for five years to get federal legislation to fund pay-for-success projects.” Last May, Congress defunded the Social Innovation Fund, an Obama-era effort launched in 2009 to support pay-for-success programs.
Also known as social-impact bonds, pay-for-success contracts (or pay-for-results, as they’re called in the new legislation) turn traditional government social services procurement practices on their head. Rather than pay upfront for services, local or state governments promise to use savings from avoided costs to repay private investors only if certain milestones are reached and outcomes delivered. “The entire project — the money, the governance, the measurement, the entire design — starts with what outcome do you want to achieve,” Tracy Palandjian of Social Finance US told ImpactAlpha in an earlier interview. “We are changing how government officials think about problems.”
The legislation in the bipartisan budget bill authorizes the US Treasury to award competitive funding to states and local governments for pay-for-success projects and feasibility studies across a range of issues. The eligible programs can target improved mental health and educational outcomes for special-needs and low-income children, better foster-care outcomes and increased proportions of children living in two-parent families, reductions in teen pregnancies and “other measurable outcomes … that result in positive social outcomes and federal savings.”
To date, a total of 20 social impact bonds, a form of pay-for-success model, have been launched in the US, attracting more than $200 million, according to the Social Finance impact bond database. In South Carolina, for example, a 2015 social impact bond raised $30 million from a range of corporate and private foundations, including the Duke Endowment, to help 3,200 first-time, low-income mothers have healthy pregnancies.
Around the world, more than 100 impact bonds have been launched, but only a few have been around long enough to notch results. Ten projects report that they have returned investors’ capital, with a return, and another eight have begun making payments (investors lost their money on at least one bond, an anti-recidivism program on Rikers Island in New York).
“We are seeing an exciting level of innovation in state and county governments to experiment with arrangements that enable social service providers to get paid for solving social problems rather than filling out paperwork,” Bugg-Levine said. “And beyond government, the logic of orienting social spending around outcomes rather than outputs is starting to gain a foothold among large hospital systems and health insurance companies who recognize the value in funding social service providers who can keep people healthy and prevent their need for expensive care.”
The continuing resolution also authorized pay-for-outcomes projects in the Maternal, Infant, and Early Childhood Home Visitation Program, such as improved maternal and newborn health, improved school readiness, and family economic self-sufficiency. “These important programs result in better outcomes for at-risk children and families, writes Jack Robinson, chief research officer at the Sorenson Impact Center at the University of Utah, in an analysis of the new legislation. “We’re seeing action in a bipartisan Congress that recognizes and corrects a market failure.”