An analysis of social impact bonds in the us federal government

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An analysis of social impact bonds in the us federal government

  1. 1. Executive Summary With the development of modern evaluation techniques and the adoption of moderntechnology, government has the means to pay for services efficiently and accurately based onservice provider performance and innovation. However, government currently lacks theappropriate financial incentives and funding mechanisms to gain from modern evaluationtechniques and technologies. To help government overcome systemic incentive and funding barriers, an emerginggovernment finance mechanism, referred to as a Social Impact Bond (SIB) has becomeincreasingly popular in the social policy arena. Social Impact Bonds, or SIBs, blendperformance-based contracting, data-driven evaluation and free-market financing as a way toaddress complex and long-standing dilemmas in social policy. The generic model envisionspublic and private funds mixing to help government pay for demonstrated success, instead of thepromise of success, while allowing social service providers to innovate and scale interventionsthat work. Observers foresee their use in recidivism, kindergarten readiness, employmentservices for hard-to-employ groups, college retention services, and preventive public health (e.g.,reducing smoking rates, obesity, diabetes, etc.). The model was born in England and is in year three of a seven-year pilot project. In theUS, two states, Massachusetts and Minnesota, have taken first steps to develop SIB-typeprojects. Massachusetts has announced through executive order a Request for Response toaddress problems related to juvenile justice and homelessness; meanwhile, Minnesota has passedthe Minnesota Pay for Performance Act, establishing a pilot program and authorizing $10 millionin bonds for a pilot. The Obama administration has announced through two separate budgetproposals, FY 2012 and FY 2013, pilots that would test SIB models in what they call ―Pay for 1
  2. 2. Success‖ projects. The pilots would span the Departments of Education, Labor, Justice and theSocial Security Administration with up to $105 million in available appropriations. There‘s just one problem: As of the last decade, Congress has consistently failed to pass abudget on time, through the regular budgetary process. And given the politics of Washington, itis unlikely that Congress will adopt Mr. Obama‘s budgetary provisions for Pay for Successprojects in the FY 2013 budget or through any shorter-term budget deals on the horizon.Because of this kind of environment, few if any of the agencies proposing to start PFS projectsactually have the authority to appropriate funds in a way conducive to success. Only twodepartments, Labor and Justice, have attempted to structure grant awards in such a way, and it islikely their efforts will fall short due to federal appropriation constraints and grant-specificfunding barriers. However, there is one agency that has, under current law, the ability to serve as a test bedfor SIBs. The Centers for Medicare and Medicare Services has launched an Innovation Center,to test payment and service delivery models to reduce program expenditures, while preserving orenhancing the quality of care for beneficiaries of Medicare, Medicaid or CHIP. Congress hasprovided the CMS Innovation Center with $10 billion over 10 years to transition healthcaredelivery and financing away from the current fee-for-service payment model to one that ispredicated on performance – something that is in line with aspirations of SIB advocates. This report highlights why the CMS Innovation Center is ripe for testing SIB models,especially among Medicaid and CHIP populations currently enrolled or eligible for programs ledby other agencies. Further, it discusses opportunities to involve the ―social impact investment‖sector with traditional government funding to impact larger segments of the budget and todevelop superior methods of program evaluation to inform other parts of government. 2
  3. 3. Background In order to understand the range of options available to federal policymakers regardingSocial Impact Bonds, it is important to understand first their various shapes and sizes. The SIBconcept stems from a branch of private sector investment strategies and is in the process of earlydeployment in the United Kingdom and in the United States at all levels of government. TheSIB model has not yet successfully proven itself, but its promise – to sustain and scale complexsocial service programs, to generate significant savings across a host of federal programs and toengender social policy innovation – is too great to ignore.The first (and generic) Social Impact Bonds In September 2010, an important pilot project began in the village of Peterborough,England. Recidivism rates among ―short sentenced prisoners‖ (individuals imprisoned for lessthan twelve months) in the United Kingdom was high. According to a March 2010 study by theU.K. National Audit Office, around 60 percent of this group is convicted of at least one offencein the first year after release, inflicting an estimated economic and social cost of £7 billion to £10billion a year.1 In fact, this study found that each short sentenced prisoner who reoffended afterrelease in 2007 was convicted, on average, of five further offences within the year. However, asolution to this problem was difficult for a number of reasons. In recounting the experience, Alisa Helbitz and Janette Powel of the U.K.-based SocialFinance, Ltd. explained that, ―There was no funding available to work at scale with shortsentenced prisoners because they are not a statutory groupi…and programmes tended to bepiecemeal and inconsistently funded.‖2 They also identified the shortcomings of typicali In the UK, a ―statutory group‖ is a publicly funded body - examples include schools, day centers, localcouncil departments, health authorities, police and the fire service 3
  4. 4. government contracts in terms of incentives and performance measurement, saying that outputs-based contracts tended to focus on quick wins rather than on sustainable rehabilitation.Desperate for a solution to this problem, the U.K. Ministry of Justice contracted with SocialFinance, Ltd. to help manage the first Social Impact Bond pilot.Mechanics of SIBs in brief The generic SIB model (depicted in Figure 1) provisions governmental services byleveraging private-sector mechanisms akin to bond issuersii. As explained by Jeffrey Leibman, aHarvard economist and author of a 2011 report for the Center for American Progress, ―Under theSIB model, a government contracts with a private-sector financing intermediary [referred to as]‗social impact bond-issuing organizations‘ (SIBOs) to obtain social services. The governmentpays the SIBO entirely or almost entirely based upon achieving performance targets. If thebond-issuing organization fails to achieve the targets, the government does not pay.‖3 A moreconcise definition comes from a March 2012 Center for American Progress report, calling them,―(a)n arrangement between one or more government agencies and an external organization wherethe government specifies an outcome (or outcomes) and promises to pay the externalorganization a pre-agreed sum (or sums) if it is able to accomplish the outcome(s).‖4 Figure 1demonstrates how SIBOs issue bonds to private investors, who in turn, provide the necessaryupfront capital to service providers in exchange for a share of the government payments, ifperformance targets are met.ii Though they are called bonds, SIBs have both equity and debt-like features 4
  5. 5. Figure 1: Generic SIB Model In the U.K., Social Finance raised £5 million ($8 million) from seventeen investors topilot the One* Service – an anti-recidivism program among short-sentenced prisoners leavingPeterborough prison.5 The U.K. Ministry of Justice and the Big Lottery Fund agreed to repaythese investors if one-year post-release reconvictions decreased by at least 7.5 percent, relative toa comparison group. The Peterborough prison SIB has an eight-year term, with capitaldrawdowns made annually in years one through six. Payments to investors, if they become due,occur in approximately years four, six and eight; and returns are commensurate with socialoutcomes and will range between 2.5 and 13 percent.6 Figure 2 illustrates how the SIBO, in this case referred to as the ―IntermediaryOrganization‖ is the central component, managing services providers, negotiating with investorsand acting as go-between for government payers. Whereas the generic SIB model described byDr. Liebman shows only one service provider, the Peterborough prison SIB model worked withfour core service providers to reduce recidivism; three non-profits handled immediate needs of 5
  6. 6. an offender before and after release from prison, while the fourth focused support oversubsequent months and continued work on longer-term objectives.7Figure 2: Peterborough Model The Peterborough pilot is now entering its second year, and an interim report indicatesthat utilization of program services is high – though it will be another two to three years beforeinvestors will know if Social Finance is hitting their 7.5 percent recidivism reduction goals. 8Even though the world‘s first SIB-based interventions are less than two years old, the concepthas taken root across the globe and is beginning to make its way to the United States. 6
  7. 7. Social Impact Bonds versus Impact Investing Social Impact Bonds are perhaps the newest financial instrument in what is referred to asthe ―impact investing sector.‖ According to the Global Impact Investing Network (GIIN),―impact investments are investments made into companies, organizations, and funds with theintention to generate social and environmental impact alongside a financial return.‖9 And thereexists a small, but growing appetite for these kinds of investments in traditional capital markets.A report produced by GIIN and J.P. Morgan in December 2011 found investors in this sectorplan to invest almost $4 billion in 2012, and most expect that 5-10 percent of overall portfolioswill be allocated to impact investments in ten years.10 The report also saw a doubling in thenumber of private impact investment transactions between 2010 and 2011. A 2009 report by the Monitor Institute categorized investors according to theirpreferences for high financial returns versus high social returns. Figure 3 depicts the area ofoverlap between those who are interested most in financial returns and those who seek optimizedsocial returns.11 The upper-right quadrant shows that profit-maximizing investors andphilanthropic investors share common ground when the investment yields returns above thefinancial floor and has an impact above a level that will satisfy the ―impact first‖ investors. 7
  8. 8. Figure 3: Generic Impact Investment In the US, state and local jurisdictions have taken the lead in experimenting with impactinvesting. One project in 2006, convened by the City of New York, brought together a syndicateof twleve banks led by JPMorgan Chase and a group of nine foundations to address the city‘sdepleted real estate stock for affordable housing development by creating the NYC AcquisitionFund.12 The Fund was designed to enable affordable housing developers to access flexiblecapital on a timely basis in order to acquire properties opportunistically when they come on themarket. The New York City experience attracted $200 million in investments and has spurredsimilar efforts in Louisiana, Los Angeles and Chicago.13 Several efforts are currently examining various dimensions of the ―impact investingsector,‖ at home and abroad. Research is currently underway at the Initiative for Responsible 8
  9. 9. Investment at Harvard University, supported through a grant by The Rockefeller Foundation, onhow public policy can have a catalyzing effect for institutional asset owners interested in impactinvestments.14 Generally, their policy recommendations are limited to enabling functions of thetax code, such as tax credits and subsidies for industries and sectors that meet specific impactgoals, e.g. green building standards; providing safe harbor to reduce risk in unconventionalmarkets; and providing R&D, technical assistance and convening key stakeholders forknowledge sharing.15 While such approaches may have a profound impact on the availability of financialresources to address social problemsiii, the SIB model is a more direct policy lever. A review ofimpact investment literature reveals that most of the projects tend to be focused on developingregions of the world, away from the burdens of a complex democratic political economy. Fewimpact investment case studies discuss the role of government actors, and even the Harvardresearch envisions an ancillary role for state (but primarily federal) government. Social Impact Bonds acknowledge and seek to leverage governmental resources, workingwithin its systems and through its bureaucracy, not outside or parallel from it. At its core, theSIB model is meant to demonstrate, not just new ways to spend government funds, but new waysto deliver services, monitor and evaluate programs and test counterfactuals.Emerging SIB models in the US Two states and the federal government are undergoing experiments in SIBs. Minnesotaand Massachusetts have set their respective wheels in motion to test ideas that look similar to thegeneric SIB model. One has opted to approach SIBs through the legislative process, the other isiii Harvard‘s research suggests there is over $20 trillion available through institutional assets, such as pension funds,endowments and insurers that may be tapped for impact investing. 9
  10. 10. acting through executive action – both of which may help inform current and future endeavors atthe federal level. The Minnesota state legislature passed a bill in March of 2011, the Minnesota Pay forPerformance Act, establishing a pilot program and authorizing $10 million in bonds for thepilot.16 The Minnesota approach is slightly different than the generic SIB model. In theMinnesota-adopted ―Human Capital Performance Bond‖ model, the state plays the role of SIBOby issuing annual appropriations bonds directly to external investors (see Figure 3).17Figure 3: Human Capital Performance Bond (HuCAP) Model (Minnesota) In his book, ―The Non Nonprofit: For-Profit Thinking for Nonprofit Success,‖ StevenRothschild explains how the HuCAP model relies on annual appropriation bonds issued toexternal investors by the Minnesota legislature.18 The cash generated by the bonds is thendeposited into a state-maintained performance pool, where it held to pay non-profit serviceproviders if they meet performance targets. Concurrently, a working capital pool is established 10
  11. 11. through a combination of foundation program-related investments (PRIs), bank communitydevelopment corporations (CDCs) and other external investors. This pool provides workingcapital to the non-profit, if needed, while the service or intervention is being implemented. Ideally, if performance targets are met: 1. The nonprofits receive payment for achieving an outcome - Once the non- profit achieves an outcome, the performance pool provides a payment to the non- profit, based on the net present value (NPV) of the benefit being created. From this payment, the non-profit can pay off the loan it made from the working capital pool, and invest in scaling the program. 2. Investors receive the market rate return they were promised at the time the bond was issued – One of the innovations in this model is that investors bare relatively little risk by investing. Even if the program is not deemed a success and the non-profit is not paid, investors still receive the return they were promised in the HuCAP model because the state still has use of the bond funds for principal repayment, interest, retiring the bond early or other purposes until the bond period terminates. However, the investments are not entirely risk-free.iv 3. The state receives return on investment – This return could generate cash flows to fund interest and principal repayment, and, perhaps incremental cash to reinvest in the performance pool. One potential challenge lies in determining which state department has accrued savings. The model dictates that incremental taxes and savings in public costs must be accounted for by debiting the stateiv The HuCAP model is dependent on annual appropriation bonds (more accurately defined as annual appropriationpledges by the Municipal Securities Rulemaking Board) and these ―bonds‖ are a type of financing that commits thestate to make payments ―to the extent that moneys are budgeted and appropriated on an annual basis by the issuer‘sor obligor‘s governing body. The governing body is not legally obligated to make such appropriation in any year.‖(more at http://www.msrb.org/msrb1/glossary/view_def.asp?param=ANNUALAPPROPRIATION) 11
  12. 12. department budgets the have benefited and in order for there to be positive return on investment, amounts documented through increased state tax revenue or cost avoidance must cover the state‘s costs in financing and administering the pilot program.19 Minnesota has yet to announce any specific projects, as of the end of April 2012. While Minnesota took the legislative route and is still trying to decide where best tobegin its first SIB experiment, Massachusetts is working on plans directed through the executivebranch. On January 18, 2012 Massachusetts became the first state to issue a competitiveprocurement meant to obtain services using social innovation financing contracts.20 The Requestfor Response sought information for using social innovation financing to address chronichomelessness and juvenile justice in the Commonwealth. Specifically, Governor Duval Patrickcited ―pay for success‖ contracts and social impact bonds as possible avenues to ―partner withsocial entrepreneurs‖ to: Provide stable housing for several hundred chronically homeless individuals as a means to improve the well-being of the individuals while simultaneously reducing housing and Medicaid costs. Support youth aging out of the juvenile corrections and probation systems so as to assist them in making successful transitions to adulthood. The juvenile justice contract will be designed with the specific goal of reducing recidivism and improving education and employment outcomes over a six-year period for a significant segment of the more than 750 youth who exit the juvenile corrections and probation systems annually. 12
  13. 13. Less is known about how Massachusetts may adapt the generic SIB model. According to onereport, the state‘s approach ―might slice the expected revenue stream into tranches, offer thelower-risk tranches to foundations, and pitch the premium tranche to investors with the highestappetite for return.‖21 However, the state has yet to release details of its first pilot. Stemming from the multi-year negotiation process in Peterborough, England, SocialFinance has published a number of guides and resources for would-be SIB stakeholders. In ―ATechnical Guide to Developing Social Impact Bonds,‖ Social Finance outlines the broadprerequisites needed to establish a contract between a public sector payer and private sectorinvestors.22 In his report for the Center for American Progress, Dr. Liebman incorporateselements of the Technical Guide to list five criteria that must be met to increase chances forsuccess under a SIB model:23 (1) The interventions must have sufficiently high net benefits; (2)The interventions must have measurable outcomes; (3) The treatment population must be well-defined up front; (4) Impact assessments must be credible with a reliable comparison group orcounterfactual and (5) Unsuccessful performance must not result in excessive harm. The March2012 CAP report further adds that SIBs require ―government to place few, if any, controls on theway that the external organization accomplishes the outcome,‖ meanwhile the government wouldbe expected to ―cooperate with the external organization so that it is able to take the actionsnecessary to achieve the outcome—for example, by ensuring access to relevant data.‖24 The funding challenges associated with the intervention at Peterborough prison are notunique to the United Kingdom. The U.S. federal budgeting system suffers from many of thesame aliments related to the federal appropriations process. For instance: 13
  14. 14. Appropriations for social programs, especially preventative services, are contingentupon one- or two-year cycles. In the federal budget, most appropriations are availablefor only the fiscal year specified in the enacting clause of the appropriations act.Exceptions are made through multi-year and ―no-year‖ appropriations. Multi-yearappropriations are those that are available for obligation for a definite period of time inexcess of one fiscal year; no-year appropriations are available for obligation for anindefinite period.25 A no-year appropriation is usually identified by appropriationlanguage such as ―to remain available until expended.‖ No-year appropriations aregenerally reserved for research & development, procurement of construction projects andlarge information technology implementations, or revolving or enterprise funds. Thesekinds of appropriations provide agency-level flexibility; however, they also underminethe ability of Congress to provide oversight, regarding the time availability of funds. Forthis reason, Congress is not usually keen on including large numbers of these kinds ofappropriations each year.Funding streams that support preventative interventions are often different fromthe programs for which cost savings are intended to accrue. Improving childhoodobesity, for example, could positively impact the bottom line of several other programsspanning the Department of Health & Human Services and the Education Department.However, success and failure of such a program is not easily attributable, and so, fundsmay become difficult to obtain on a consistent basis.There is an inherent inflexibility built into most grants. Agencies cannot directlycontrol behavior of grant recipients. So in much the same way that Congressappropriates funds with explicit rules governing the amount and purpose of expenditures, 14
  15. 15. agencies, too, develop rules pertaining to program structure and performance measures.26 However, it should be noted that some grants are less prescriptive than others. However, there is a strong argument to be made – in fact, is being made – by policymakersthat SIB models can be tested through federal programs. In a factsheet accompanying PresidentObama‘s FY 2012 budget, his administration announced its intentions to leverage SIBs.―As part of this Administration‘s commitment to using taxpayer dollars effectively, we areemploying innovative new strategies to help ensure that the essential services of governmentproduce their intended outcomes… Pay for Success is an innovative way of partnering withphilanthropic and private sector investors to create incentives for service providers to deliverbetter outcomes at lower cost—producing the highest return on taxpayer investments.v Theconcept is simple: pay providers after they have demonstrated success, not based on the promiseof success, as is done now.‖27 Through the FY 2012 budget, President Obama pledged $100 million across sevenprogram areas located within the Department of Education, the Social Security Administration,the Department of Justice, the Department of Labor and the Corporation for National andCommunity Service. 28 Proposed projects ranged from workforce development and juvenilejustice to care of children with disabilities. The FY 2012 budget was not enacted by Congress,so in February 2012, President Obama again pledged money to test SIBs. Under the President‘sFY 2013 budget, $105 million would be available for agencies to demonstrate Pay for Successv It is important to note that the Obama administration uses the phrase ―Pay for Success,‖ or PFS projects, todescribe its work in this arena, but thus far, federal models are adaptations of the generic SIB model. 15
  16. 16. projects. Appendix A provides a crosswalk between FY 2012 and FY 2013 budget proposalsand an examination of the budget text reveals the primary appropriation mechanism being usedto leverage SIB financing models: 31 U.S.C. § 1552(a). On the face of it, all the proposed funds used for SIBs are pieces of a larger program orappropriations account. And, generally, 31 U.S.C. § 1552(a) gives any fixed appropriationwithout a predetermined period of availability a five-year lifespan, after which time, anyremaining balance in the fund (whether obligated or unobligated) is cancelled and unavailablefor obligation or expenditure for any purpose.29 In his FY 2012 and FY 2013 budgets, thePresident uses the standard language for no-year appropriations (e.g. ―may remain available fordisbursement until expended‖) and adds the phrase ―notwithstanding 31 U.S.C. § 1552(a).‖ Thiscombination of phrasing is then followed by a proviso that any deobligated funds areimmediately available for some related purpose. Unfortunately for SIB advocates, such languagehas never made it into law (at least where SIBs are concerned) and so federal agencies areconstrained by current language and protocol. Given this, two agencies are making good on thepresident‘s pledge to set up pilots under existing authority: the Department of Labor, theDepartment of Justice. In February 2012, the Department of Labor‘s Employment and Training Administrationheld a listening session to describe to potential stakeholders how a portion of the WorkforceInnovation Fund could be used to test a Pay for Success financing model. The WorkforceInnovation Fund ―invests in programs that support, evaluate and enhance workforce investmentstrategies, particularly for vulnerable populations,‖ according to a description on the Departmentof Labor website.30 Up to $20 million is available to pilot the funding approach, but details will 16
  17. 17. not be available until a second Workforce Innovation Fund solicitation is issued sometime inApril 2012.31 Meanwhile, the Department of Justice is looking to take a page from the Peterboroughprison playbook. The DOJ‘s Bureau of Justice Assistance has the most developed PFS plans ofany federal agency and recently they announced plans to give priority funding consideration inthree Second Chance Act (SCA) grant solicitations to qualified applicants who incorporate PFSmodels in their program design.32 SCA Programs are designed to help communities develop andimplement comprehensive strategies that address challenges posed by offender reentry andrecidivism reduction. The Bureau of Justice Assistance held a briefing for stakeholders onMarch 6, 2012 to explain how PFS models could fit into three SCA programs and explained howthe financing model would differ from that used in the Peterborough pilot. According to the March 6 presentation, SCA grant funds can be used as a portion ofworking capital to pay for direct services or to reimburse for outcomes achieved during theproject period.33 However, statutory constraints do not allow SCA funds to be used to pay areturn on investment to organizations that provided working capital.34 This is due mainly to thefact that SCA grants can only be awarded to units of state and local or tribal governments. Infact, there are a number of unique provisos attached to SCA funds: Grants can only be awarded to units of state and local or tribal governments; Project periods are limited in time (1-2 years) depending on the program; and Office of Justice Programs prohibits using funds for profit-making SCA grant funds are also matching grants, so applicants must provide cash and ―in-kind‖ funds equaling 50 percent of the award. 17
  18. 18. Due to these budgetary constraints, the SCA-envisioned model looks, again, slightlydifferent than the generic SIB model. In Figure 4, the federal government awards money to astate/local or tribal governmental agency that then works with an intermediate organization tooversee service providers and facilitate additional working capital from private investors. SCAfunds have to be used as working capital in this model, so it is envisioned that savings would beconfined to state/local or tribal level governments, who in turn, require less from federalgovernment in support of the goals of the Second Chance Act.Figure 4: Second Chance Act Pay for Success Model (Dept. of Justice) According to DOJ officials, state, local or tribal governments can pay returns oninvestment (if service providers achieve quantifiable cost reductions) but that money must be 18
  19. 19. separate from the matching funds offered by the state, local or tribal governments. It was notevident that the DOJ would have any role in the final arbitration of incentive or ROI, due to theprohibition of such uses with SCA funds. Submission deadlines are April 24, 2012, so it is notyet clear what, if any, SIB models will emerge from applicant grantees.One definition, many models Clearly, the SIB model can accommodate several variations on the one developed inPeterborough, England. The intermediate organization could play a host of roles from using itsown funds to pay service providers, or it could act as one of the service providers itself. Thegovernmental entity also has potential for variation, depending on budgeting statute, to be furtherremoved from (Department of Justice) or more involved with (Minnesota) private sectorinvestors. While there may be program or agency-specific statutes dictating how the SIB modellooks, the Obama administration has relied on no-year appropriations language buttressed against31 U.S.C. 1552(a) to articulate how SIB funds should be accounted for in the federal budget.However, with little promise of such language being adopted by a divided Congress, additionalareas of federal programs must examined. Beyond recidivism, areas often cited as likely candidates for SIBs include kindergartenreadiness, employment services for hard-to-employ groups, college retention services, reducinghomelessness, and preventive public health (e.g., reducing smoking rates, obesity, diabetes, etc.).However, it is difficult to foresee proposed PFS projects getting off the ground, given theconstraints of the federal appropriations process. Advocates of the SIB model may do well tolook beyond the typical departments of social programs, to areas of the federal budget that havemore flexibility, but could also have a positive impact on populations in need. 19
  20. 20. Social Impact Bonds and the US healthcare system Several conditions necessitate a deviation from status quo healthcare spending. TheCenters for Medicare & Medicaid Services (CMS) says that it spent $549.1 billion on benefitsfor its Medicare Part A and Part B in 2011.35 Taken in a broader context, expenditures in theU.S. on healthcare exceeded $2.6 trillion in 2010, which translates to $8,402 per person or 17.9percent of the nations Gross Domestic Product.36 Many observers agree that US spending onhealthcare has been exacerbated by a fee-for-service healthcare market that does not encourageproper incentives. Rather than pay doctors according to outcomes, i.e. improved wellness forpatients or preventative care, Medicare and insurance companies pay doctors according to howmany patients they see. Public efforts are now underway to transition Medicare from fee-for-service to pay-for-performance, including parts of 2010 health reform. In an attempt to address these misalignments in payments, the Patient Protection andAffordable Care Act (ACA) was enacted March 23, 2010. The ACA includes a number ofprovisions designed to improve the quality of Medicare services, support innovation andestablish new payment models. The intent of these efforts is to achieve the so called, three partaim: better health, better health care, at lower costs per beneficiary. Specifically, under section3021 of the Affordable Care Act, Congress created the CMS Innovation Center, tasking it to―test innovative payment and service delivery models to reduce program expenditures, whilepreserving or enhancing the quality of care‖ for those who get Medicare, Medicaid or CHIPbenefits.37 In the year since it launched, the Innovation Center has introduced over a dozeninitiatives across four ―provider pathways:‖ Accountable Care Organizations; Enhanced PrimaryCare; Bundled Payments for Care Improvement and Duals Initiatives and Models. According to 20
  21. 21. its FY 2012 budget justification, CMS says the ACA provides for the Innovation Center, ―$10billion in budget authority for fiscal years 2011 through 2019 with not less than $25 million to bemade available each year for the design, implementation, and evaluation of innovative paymentand service delivery models to reduce program expenditures while preserving or enhancingquality of care.‖38 Because it is a new component of CMS, its Funding History had a single lineitem: $5 million in 2010. The FY 2013 budget justification for the Innovation Center does notdisclose much about how the 16 initiatives had been performing vis-à-vis its budget, insteadpromising ―actual [performance metrics] data for FY2011 and targets for future years‖ in FY2014 budget documents.39 This makes it difficult to tell how much work the Innovation Centerhas done to quantify its efforts. The FY 13 budget justification speaks in general terms about itsoperational activity, but there are no monetary specifics. The President‘s Budget Appendix forHHS is slightly more revealing, indicating that the Innovation Center has spent $733 million inFY 2012, while obligating around $1.3 billion.40 Turning to the text of the legislation, the Innovation Center is in a unique position froman appropriation standpoint, because the ACA provided $10 billion for the FY2011-FY2019period—and $10 billion for each subsequent 10-year period.41 Further, the law states that fundsmade available subsequent to fiscal 2019 ―shall remain available until expended;‖ in short, theyare no-year funds.42 Previously, it was stated that SIBs would have trouble working in funding environmentswhere: Appropriations for social programs, especially preventative services, are contingent upon one- or two-year cycles. 21
  22. 22. o The funding channels currently established for the CMS Innovation Center could easily address this first challenge. The Innovation Center has substantial funding until 2019 and then has the authority to establish programs with flexible, no-year designations. Funding streams that support preventative interventions are often different from the programs for which cost savings are intended to accrue. o This remains a challenge. However, many programs currently being established and tested through the Innovation Center are attempting to create savings through preventative interventions. There is an inherent inflexibility built into most grants o Some of the programs being established by the Innovation Center are stringently designed around quality measures, but funding recipients are given flexibility on how best to achieve those quality measures. Contrary to the SIBs being established through the Department of Labor and Justice, anSIB-based demonstration project through the Innovation Center would not need additionalCongressional action, nor is it contingent on the President‘s Budget being adopted through thedesignated budgetary process. The provisions currently established in Second Chance Act grantfunds, for example, will make it very difficult for viable and scalable SIB models to emerge. Moreover, the Innovation Center‘s funding structure could also allow the InnovationCenter to compliment and inform similar work performed though programs in other agencies(especially those that work alongside Medicaid and CHIP populations) without a change to 22
  23. 23. current law. Turning back to Dr. Liebman‘s barriers to social innovation, the CMS InnovationCenter is in an ideal position inside CMS to bypass most, if not all, barriers. Barriers CMS Innovation Center Government funding is All of the pilot projects under way through 1 insufficiently focused on Innovation Center are focused on results and results and performance performance Inadequate performance Performance evaluation sits at the heart of evaluation allows 2 Innovation Center culture and would likely be a ineffective programs to primary driver of pilot project parameters persist The proof-of-concept One of Innovation Center‘s main aims was to help 3 process for social address this problem innovations is slow Innovation is risky and Since CMS Innovation Center works under an 4 public officials are wary "incubator mindset" it is not afraid to "fail fast" as of failure the cliché goes Another focus of Innovation Center is to better tie Preventive programs outcomes to funding and then to align incentives often don‘t get funded 5 and budget appropriations. Identifying perverse out of the budgets they incentives and testing alternatives is also a main help reduce goal Performance-based The Innovation Center‘s $10 billion appropriation funding requires upfront 6 over ten years is meant to help provide start-up investments and the capital to identify projects to scale ability to absorb risk After understanding the basics of social impact bonds and understanding howgovernments at federal, state and local levels are looking to leverage them, their potentialstrengths and weaknesses can be better understood. While there is great promise in theirapplication to make government smarter purchasers of social services, there is equal challenge intheir deployment – be it due to funding and appropriation norms or due to finding appropriatepopulations and / or interventions. 23
  24. 24. President Obama‘s FY 2012 and FY 2013 budgets would test the pay for success modelin modest ways, but unless the needed changes are made to the proposed agencies‘ currentfunding mechanisms, there is little chance the models will work. Rather than forcing PFS pilotsthrough ill-suited programs, the Obama administration should look to test such models in areasof the government that have the proper funding landscape, such as the CMS Innovation Center. The CMS Innovation Center is ripe for testing SIB models, especially among Medicaidand CHIP populations currently enrolled or eligible for programs led by other agencies. Further,there is an opportunity to involve the ―social impact investment‖ sector with traditionalgovernment funding to impact larger segments of the budget and to develop superior methods ofprogram evaluation to inform other parts of government. In the end, it may not be the perfection of the social impact bond model that has the kindof lasting effect on government programs. However, through the process of developing andmaintaining an SIB model-funded program, government is likely to learn valuable lessons inprogram management, procurement, program evaluation and possibly how to better scale-uppromising social programs. 24
  25. 25. ENDNOTES1 U.K. National Audit Office, “Managing offenders on short custodial sentences,” 10 March 2010http://www.nao.org.uk/publications/0910/short_custodial_sentences.aspx2 Alisa Helbitz, Janette Powel, Emily Bolton, Suzanne Ashma, Sarah Henderson, “Social Impact Bonds:The One* Service. One year on.” Social Finance Ltd., November 2011 (pg. 9)http://www.socialfinance.org.uk/sites/default/files/sf_peterborough_one__year_on.pdf3 Jeffery Liebman, “Social Impact Bonds: A promising new financing model to accelerate social innovationand improve government performance” Center for American Progress, February 2011 (pg. 2)http://www.americanprogress.org/issues/2011/02/pdf/social_impact_bonds.pdf4 Jitinder Kohli, Douglas J. Besharov, and Kristina Cost, “What Are Social Impact Bonds? An InnovativeNew Financing Tool for Social Programs” Center for American Progress, 22 March 2012 (pg. 2)http://www.americanprogress.org/issues/2012/03/pdf/social_impact_bonds_brief.pdf5 “A New Tool for Scaling Impact: How Social Impact Bonds Can Mobilize Private Capital to AdvanceSocial Good,” Social Impact Inc., February 2012http://www.socialfinance.org.uk/sites/default/files/small.socialfinancewpsinglefinal.pdf6 Helbitz, Powel, Bolton, et al. “Social Impact Bonds: The One* Service. One year on.” (pg. 9-10)7 Ibid. (pg. 9-10)8 Ibid. (pg. 2)9 Global Impact Investing Network, What is Impact Investing?, http://www.thegiin.org/cgi-bin/iowa/investing/index.html10 Yasemin Saltuk, Amit Bouri, Giselle Leung. “Insight into the Impact Investment Market,” J.P. MorganSocial Finance and The GIIN, 14 December 2011 http://www.thegiin.org/cgi-bin/iowa/resources/research/334.html11 Jessica Freireich, Katherine Fulton, “Investing for Social and Environmental Impact: A Design forCatalyzing and Emerging Industry,” Monitor Institute, January 2009http://www.monitorinstitute.com/impactinvesting/documents/InvestingforSocialandEnvImpact_FullReport_004.pdf12 Ibid.13 Ibid.14 “Impact at Scale: Policy innovation for institutional investment with social and environmental benefit,”InSight at Pacific Community Ventures & the Initiative for Responsible Investment at Harvard University,February 2012 (pg. 8-10)http://www.pacificcommunityventures.org/uploads/research/pdf/ImpactReport_FINAL2.10.12.pdf15 Ibid.16 H.F. No. 681, 1st Engrossment - 87th Legislative Session (2011-2012) “Minnesota Pay forPerformance Act of 2011” 23 March 2011https://www.revisor.mn.gov/bin/bldbill.php?bill=H0681.1.html&session=ls8717 Graphic representation of HuCAP Model courtesy Steve Rothschild, founder, Invest in Outcomes andthe National Conference of State Legislatures (June 2011)http://www.ncsl.org/documents/sfn/SteveRothschild11.pdf18 Steven Rothschild, The Non Nonprofit: For-Profit Thinking for Nonprofit Success, San Francisco: JohnWiley & Sons, January 201219 st H.F. No. 681, 1 Engrossment – 87th Legislative Session (2011-2012) “Minnesota Pay for PerforamnceAct of 2011” 23 March 2011 (lines 2.19 – 2.21)20 Office of Governor Patrick Duval, “Massachusetts First State in the Nation to Pursue Pay For SuccessSocial Innovation Contracts,” Executive Office for Administration and Finance, 18 Jan 2012http://www.mass.gov/anf/press-releases/ma-first-to-pursue-pay-for-success-contracts.html21 Michael Belinsky, “Social Impact Bonds: Lessons from the Field,” Stanford Social Innovation Review,23 Jan 2012 http://www.ssireview.org/blog/entry/social_impact_bonds_lessons_from_the_field22 Social Finance Ltd. “A Technical Guide to Developing Social Impact Bonds,” March 2011http://www.socialfinance.org.uk/sites/all/modules/pubdlcnt/pubdlcnt.php?file=/resources/social-finance/Technical_Guide_Overview.pdf&nid=30523 Liebman (pgs. 3-4, 18-25) 25
  26. 26. 24 Kohli, Besharov and Cost (pg. 2)25 Government Accountability Office, “Principles of Federal Appropriations Law” Third Edition, Volume 1,2004 (pg. 2-14)26 Phillip Joyce, “Linking Performance and Budgeting: Opportunities in the Federal Budget Process,” IBMCenter for the Business of Government, October 2003 (pg. 32)http://www.businessofgovernment.org/sites/default/files/PerformanceandBudgeting.pdf27 Office of Management and Budget, Budget of the United States Government: Fiscal Year 2012, FactSheet, “Paying for Success,” (Washington DC: GPO 2011)http://www.whitehouse.gov/omb/factsheet/paying-for-success28 Office of Management and Budget, Budget of the United States Government: Fiscal Year 2012(Washington DC: GPO 2011) http://www.whitehouse.gov/files/documents/budget_2012.pdf29 31 U.S.C. 1552 – Procedure for appropriation accounts available for definite periodshttp://www.gpo.gov/fdsys/pkg/USCODE-2010-title31/pdf/USCODE-2010-title31-subtitleII-chap15-subchapIV-sec1552.pdf30 U.S. Department of Labor, Education and Training Administration, Workforce Innovation Fund,http://www.doleta.gov/workforce_innovation/31 Ibid.32 U.S. Department of Justice (DOJ), Office of Justice Programs (OJP), Bureau of Justice Assistance(BJA) Second Chance Act: Adult Offender Reentry Program for Planning and Demonstration Projects FY2012 Competitive Grant Announcement; Reentry Program for Adult Offenders with Co-OccurringSubstance Abuse and Mental Health Disorders FY 2012 Competitive Grant Announcement; and Family-Based Adult Offender Substance Abuse Treatment Program FY 2012 Competitive Grant Announcement,https://www.bja.gov/funding.aspx33 U.S. Department of Justice, Bureau of Justice Assistance, Presentation “Pay for Success and theDepartment of Justices (DOJ) Second Chance Act Solicitations,” 6 March 2012http://payforsuccess.org/sites/default/files/pfs_doj_webinar_presentation_slides.pdf (Slide 16)34 Ibid. (Slide 18)35 Boards of Trustees of the Federal Hospital Insurance and the Federal Supplementary MedicalInsurance Trust Funds “2012 Annual Report of the Boards of Trustees of the Federal Hospital Insuranceand the Federal Supplementary Medical Insurance Trust Funds,” (Washington, D.C.) 23 April 2012http://www.treasury.gov/resource-center/economic-policy/ss-medicare/Documents/TR_2012_Medicare.pdf36 Martin, A.B. et al. January 2012. Growth in US health spending remained slow in 2010; Health share ofgross domestic product was unchanged from 2009. Health Affairs 31(1): 208-219.37 Public Law 111-148, SEC. 3021. Establishment of Center for Medicare and Medicaid Innovation withinCMS, (Washington DC: GPO 2010) http://www.gpo.gov/fdsys/pkg/PLAW-111publ148/pdf/PLAW-111publ148.pdf38 Department of Health and Human Services, Centers for Medicare and Medicaid Services, Fiscal Year2012 Justification of Estimates, (Washington, D.C. 2011) (pg. 241)https://www.cms.gov/PerformanceBudget/Downloads/CMSFY12CJ.pdf39 Department of Health and Human Services, Centers for Medicare and Medicaid Services, Fiscal Year2012 Justification of Estimates, (Washington, D.C. 2011) (pg. 285)https://www.cms.gov/PerformanceBudget/Downloads/CMSFY13CJ.pdf40 The Appendix, Budget of the United States Government, Fiscal Year 2013, Center for Medicare andMedicaid Innovation (Washington, D.C. 2012) (pg. 499)http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hhs.pdf41 Congressional Research Service, Budget Control Act: Potential Impact of Spending Reductions onHealth Reform (Washington, D.C.) 23 March 201242 Public Law 111-148, SEC. 3021. Establishment of Center for Medicare and Medicaid Innovation withinCMS, (f)(B) & (C) (Washington DC: GPO 2010) http://www.gpo.gov/fdsys/pkg/PLAW-111publ148/pdf/PLAW-111publ148.pdf 26

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