Notes from a PFS Journey: Three Years Later
Three years ago I attended the White House Convening on Civic Engagement and Social Innovation with about 70 other participants. We were called pioneers in social impact investing. My invitation came as a consequence of the work I had done with support from the California Endowment to explore a Pay For Success Initiative to reduce Asthma related emergencies in Fresno, California and now in Alameda County. For anyone curious about the nature of Pay for Success initiatives, Social Finance has just released its analysis of their six year history as a financial intermediary in this emerging field. While the candor of their report is notable, there’s more to be seen from the front lines.
But first, what is a Social Impact Bond (SIB) or Pay for Success Initiative (PFS)?
The idea in short: private investors fund evidenced based interventions to address major social problems that eventually save taxpayer dollars for which a state, city or county pays for successful outcomes from those savings. The unique strategy in both Fresno and Alameda County is to draw the attention of a different set of payors: health insurance companies and self insured employers that would see reduced health care costs for asthma related hospitalizations and emergency room visits. At long last, the initiative in Alameda County has begun enrolling its first round of participants.
Why the time lap? It's complicated.
Throughout Social Finance's report the words complexity, evidence, and measured impact are emphasized in every section looking at how PFS are crafted, the challenges they face, and their potential for solving major societal problems. Social Finance reports 60 projects total on the global scale. Only 6 of these are in some stage of implementation in the US and 1 has already closed without a payout to investors. The structure of an initiative requires bringing several players to the table--an intervention provider, a willing payor, and of course the investor. In the middle of this there is the need for an evaluator, a financial intermediary to structure the deal and a knowledge intermediary like Impact4Health to address the protocols leading to a successful intervention. What has not been stated clearly enough, is that initiating a PFS hinges entirely on finding an intervention that already demonstrates the potential for measurable financial savings. Social Finance suggests that the approximately 350,000 human service nonprofits in the US are largely ready for that kind of operational rigor.
In my past work with nonprofits, public agencies and faith based organizations, I have found few are measuring the results of their programs with the precision needed to enter into a PFS agreement. Instead the daily struggle takes precedent: meet the needs of their community, engage other agencies or providers to coordinate other kinds of care or services and, oh yes, find more funding!
Why aren't we talking about metrics?
For anyone who has worked as a service provider, the challenge of meeting the mission with limited resources is nothing new. Finding metrics to prove the impact of your services—now that’s definitely a harder sell. Evaluation is expensive. Metrics can only happen if there is a consistent service delivery process and that only happens with constant training--all hard to do with small, ever changing staff. Part of the journey in Alameda County was to craft a phase of work that allowed us to first gather that data on health care costs so there is some indication about what kind of return on investment a potential investor might see. There is no easy way around that requirement.
Unfortunately, the drive for PFS initiatives—at least in the US—was largely the work of experts in finance, venture capital, or banking and not so much in social services delivery. nonprofit management or program evaluation. No doubt this is an inherent element of the financial modeling necessary for a PFS. But as one PFS initiative has already demonstrated, the financial structure is not the determinant of success. It's the intervention. If the financial requirements of a PFS are to be met, the US ecosystem in this nascent field needs a major reset on how to prepare nonprofits or public agencies for the demanding evaluations necessary to measure impact. That work—capacity building of intervention providers—must be funded with the same determination that SIB enthusiasts have demonstrated about promoting and publishing volumes on the deal structure itself. The future of PFS in the US rests on building the capacity of service providers to demonstrate impact and while that may not make the headlines or a white paper, it’s the right kind of worthy investment indeed.
