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Social impact bonds for healthcare

Private sector investment in small-scale social interventions could improve care outcomes and reduce costs

Tammy Worth, Contributor

The current mantra of health reform is: cut costs, improve quality. Unfortunately, reducing costs often requires an upfront investment in things like research and prevention.

One potential solution is social impact bonds (SIBs). The idea behind these bonds is to use the private sector to pay for smaller-scale, exploratory social interventions. If specific program goals are met, then the investors receive a payout. The programs are proved and can be looked at for use on a larger scale with public-sector funding.

[See also: Crowd funding for healthcare startups]

“It’s a creative way to borrow and puts off the day the government pays until it happens and is successful,” said Mark Pauly, a professor of healthcare management, economics and public policy at the University of Pennsylvania's The Wharton School. “People say, ‘Just give us money for God’s work and we’ll do God’s work and that should be enough for you,’ but it’s not good enough anymore. People are only going to invest money in good outcomes.”

Social impact bonds are not as common in the United States as they are in the United Kingdom. The handful of projects backed by SIBs in the U.S. are unrelated to healthcare – mostly they are for recidivism-reduction programs. For one such program – at Rikers Island in New York – Goldman Sachs has invested more than $9 million.

Pauly and colleagues looked at the potential for social impact bonds in the healthcare realm in a report released in April. He concluded that for them to work in this industry, there would have to be a concrete, provable cost reduction from a program.

“The project and outcomes have to be well-defined,” he said. “Improving the health of a poor population isn’t going to be such a good candidate. Specific things with quantifiable outcomes are the sweet spot for this activity.”

The second ingredient for success is to engage investors in the projects, he said.

“Private entrepreneurs want to be and do more than flint-eyed investors,” he said. “They want to give, but not do that and just walk away.”

Pauly said the trick will be to involve donors in the process. Investors are agreeing to accept less return than they might in a traditional investment for altruistic purposes. But they don’t want to settle for zero return. Pauly said this is a good opportunity to use their managerial expertise to ensure that the project isn’t just funded, but carried out successfully.   

“From our point of view, it sounds promising and people are interested in doing it,” he said. “I’m reluctant to predict a revolution, but it is a promising idea worth a try.”

And that is enough for Social Finance US. The organization is currently working on a pilot program that it hopes to turn into the first major healthcare social impact bond in the nation.

The project is based in Fresno, Calif., which has one of the highest rates of asthma among children in the U.S. According to a press release by the organization, nearly 20 people are treated every day in the emergency room for asthma complications, at a cost of approximately $35 million annually.

The group is working with 200 low-income families to provide education, home care and help in reducing environmental triggers that can aggravate asthma, like dust mites, mold and cigarette smoke. The California Endowment has provided $660,000 in funding for the project. The goal is to reduce emergency room visits by 30 percent and hospitalizations by 50 percent over the year, which is estimated to save $5,000 per child annually. Insurance claims data will be used to measure cost savings.

Should the program meet its goals, Social Finance would like to create a social impact bond to work with 3,500 more families and create a program that can be duplicated in other areas, said Nirav Shah, a director at the organization.

“We want to prove that asthma prevention is effective and we can use SIBs to scale up in Fresno and nationally,” Shah said. “But even broader than that, it can be a good test case for healthcare and social impact bonds … and they can be used for prevention and management of chronic disease or care coordination. It could open up the door for healthcare and prevention specifically."

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