Executive Summary

With the development of modern evaluation techniques and the adoption of modern

technology, government has the means to pay for services efficiently and accurately based on

service provider performance and innovation. However, government currently lacks the

appropriate financial incentives and funding mechanisms to gain from modern evaluation

techniques and technologies.

To help government overcome systemic incentive and funding barriers, an emerging

government finance mechanism, referred to as a Social Impact Bond (SIB) has become

increasingly popular in the social policy arena. Social Impact Bonds, or SIBs, blend

performance-based contracting, data-driven evaluation and free-market financing as a way to

address complex and long-standing dilemmas in social policy. The generic model envisions

public and private funds mixing to help government pay for demonstrated success, instead of the

promise of success, while allowing social service providers to innovate and scale interventions

that work. Observers foresee their use in recidivism, kindergarten readiness, employment

services 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 the

US, two states, Massachusetts and Minnesota, have taken first steps to develop SIB-type

projects. Massachusetts has announced through executive order a Request for Response to

address problems related to juvenile justice and homelessness; meanwhile, Minnesota has passed

the Minnesota Pay for Performance Act, establishing a pilot program and authorizing $10 million

in bonds for a pilot. The Obama administration has announced through two separate budget

proposals, FY 2012 and FY 2013, pilots that would test SIB models in what they call “Pay for

1

Success” projects. The pilots would span the Departments of Education, Labor, Justice and the

Social 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 a

budget on time, through the regular budgetary process. And given the politics of Washington, it

is unlikely that Congress will adopt Mr. Obama’s budgetary provisions for Pay for Success

projects 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 projects

actually have the authority to appropriate funds in a way conducive to success. Only two

departments, Labor and Justice, have attempted to structure grant awards in such a way, and it is

likely their efforts will fall short due to federal appropriation constraints and grant-specific

funding barriers.

However, there is one agency that has, under current law, the ability to serve as a test bed

for 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 or

enhancing the quality of care for beneficiaries of Medicare, Medicaid or CHIP. Congress has

provided the CMS Innovation Center with $10 billion over 10 years to transition healthcare

delivery and financing away from the current fee-for-service payment model to one that is

predicated 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 led

by 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 to

develop superior methods of program evaluation to inform other parts of government.

2

Background

In order to understand the range of options available to federal policymakers regarding

Social Impact Bonds, it is important to understand first their various shapes and sizes. The SIB

concept stems from a branch of private sector investment strategies and is in the process of early

deployment in the United Kingdom and in the United States at all levels of government. The

SIB model has not yet successfully proven itself, but its promise – to sustain and scale complex

social service programs, to generate significant savings across a host of federal programs and to

engender 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 less

than twelve months) in the United Kingdom was high. According to a March 2010 study by the

U.K. National Audit Office, around 60 percent of this group is convicted of at least one offence

in the first year after release, inflicting an estimated economic and social cost of £7 billion to £10

billion a year.1 In fact, this study found that each short sentenced prisoner who reoffended after

release in 2007 was convicted, on average, of five further offences within the year. However, a

solution to this problem was difficult for a number of reasons.

In recounting the experience, Alisa Helbitz and Janette Powel of the U.K.-based Social

Finance, Ltd. explained that, “There was no funding available to work at scale with short

sentenced prisoners because they are not a statutory groupi…and programmes tended to be

piecemeal and inconsistently funded.”2 They also identified the shortcomings of typical

i In the UK, a “statutory group” is a publicly funded body - examples include schools, day centers, local council departments, health authorities, police and the fire service

3

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 Social

Finance, 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 by

leveraging private-sector mechanisms akin to bond issuersii. As explained by Jeffrey Leibman, a

Harvard economist and author of a 2011 report for the Center for American Progress, “Under the

SIB model, a government contracts with a private-sector financing intermediary [referred to as]

‘social impact bond-issuing organizations’ (SIBOs) to obtain social services. The government

pays the SIBO entirely or almost entirely based upon achieving performance targets. If the

bond-issuing organization fails to achieve the targets, the government does not pay.”3 A more

concise 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 where

the government specifies an outcome (or outcomes) and promises to pay the external

organization a pre-agreed sum (or sums) if it is able to accomplish the outcome(s).”4 Figure 1

demonstrates how SIBOs issue bonds to private investors, who in turn, provide the necessary

upfront capital to service providers in exchange for a share of the government payments, if

performance targets are met.

ii Though they are called bonds, SIBs have both equity and debt-like features

4

Figure 1: Generic SIB Model

In the U.K., Social Finance raised £5 million ($8 million) from seventeen investors to

pilot the One* Service – an anti-recidivism program among short-sentenced prisoners leaving

Peterborough prison.5 The U.K. Ministry of Justice and the Big Lottery Fund agreed to repay

these investors if one-year post-release reconvictions decreased by at least 7.5 percent, relative to

a comparison group. The Peterborough prison SIB has an eight-year term, with capital

drawdowns 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 social

outcomes and will range between 2.5 and 13 percent.6

Figure 2 illustrates how the SIBO, in this case referred to as the “Intermediary

Organization” is the central component, managing services providers, negotiating with investors

and acting as go-between for government payers. Whereas the generic SIB model described by

Dr. Liebman shows only one service provider, the Peterborough prison SIB model worked with

four core service providers to reduce recidivism; three non-profits handled immediate needs of

5

an offender before and after release from prison, while the fourth focused support over

subsequent months and continued work on longer-term objectives.7

Figure 2: Peterborough Model

The Peterborough pilot is now entering its second year, and an interim report indicates

that utilization of program services is high – though it will be another two to three years before

investors will know if Social Finance is hitting their 7.5 percent recidivism reduction goals.8

Even though the world’s first SIB-based interventions are less than two years old, the concept

has taken root across the globe and is beginning to make its way to the United States.

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Social Impact Bonds versus Impact Investing

Social Impact Bonds are perhaps the newest financial instrument in what is referred to as

the “impact investing sector.” According to the Global Impact Investing Network (GIIN),

“impact investments are investments made into companies, organizations, and funds with the

intention to generate social and environmental impact alongside a financial return.”9 And there

exists 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 sector

plan to invest almost $4 billion in 2012, and most expect that 5-10 percent of overall portfolios

will be allocated to impact investments in ten years.10 The report also saw a doubling in the

number of private impact investment transactions between 2010 and 2011.

A 2009 report by the Monitor Institute categorized investors according to their

preferences for high financial returns versus high social returns. Figure 3 depicts the area of

overlap between those who are interested most in financial returns and those who seek optimized

social returns.11 The upper-right quadrant shows that profit-maximizing investors and

philanthropic investors share common ground when the investment yields returns above the

financial floor and has an impact above a level that will satisfy the “impact first” investors.

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Figure 3: Generic Impact Investment

In the US, state and local jurisdictions have taken the lead in experimenting with impact

investing. One project in 2006, convened by the City of New York, brought together a syndicate

of twleve banks led by JPMorgan Chase and a group of nine foundations to address the city’s

depleted real estate stock for affordable housing development by creating the NYC Acquisition

Fund.12 The Fund was designed to enable affordable housing developers to access flexible

capital on a timely basis in order to acquire properties opportunistically when they come on the

market. The New York City experience attracted $200 million in investments and has spurred

similar efforts in Louisiana, Los Angeles and Chicago.13

Several efforts are currently examining various dimensions of the “impact investing

sector,” at home and abroad. Research is currently underway at the Initiative for Responsible

8

Investment at Harvard University, supported through a grant by The Rockefeller Foundation, on

how public policy can have a catalyzing effect for institutional asset owners interested in impact

investments.14 Generally, their policy recommendations are limited to enabling functions of the

tax code, such as tax credits and subsidies for industries and sectors that meet specific impact

goals, e.g. green building standards; providing safe harbor to reduce risk in unconventional

markets; and providing R&D, technical assistance and convening key stakeholders for

knowledge sharing.15

While such approaches may have a profound impact on the availability of financial

resources to address social problemsiii, the SIB model is a more direct policy lever. A review of

impact investment literature reveals that most of the projects tend to be focused on developing

regions of the world, away from the burdens of a complex democratic political economy. Few

impact investment case studies discuss the role of government actors, and even the Harvard

research envisions an ancillary role for state (but primarily federal) government.

Social Impact Bonds acknowledge and seek to leverage governmental resources, working

within its systems and through its bureaucracy, not outside or parallel from it. At its core, the

SIB model is meant to demonstrate, not just new ways to spend government funds, but new ways

to 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. Minnesota

and Massachusetts have set their respective wheels in motion to test ideas that look similar to the

generic SIB model. One has opted to approach SIBs through the legislative process, the other is

iii 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

acting through executive action – both of which may help inform current and future endeavors at

the federal level.

The Minnesota state legislature passed a bill in March of 2011, the Minnesota Pay for

Performance Act, establishing a pilot program and authorizing $10 million in bonds for the

pilot.16 The Minnesota approach is slightly different than the generic SIB model. In the

Minnesota-adopted “Human Capital Performance Bond” model, the state plays the role of SIBO

by issuing annual appropriations bonds directly to external investors (see Figure 3).17

Figure 3: Human Capital Performance Bond (HuCAP) Model (Minnesota)

In his book, “The Non Nonprofit: For-Profit Thinking for Nonprofit Success,” Steven

Rothschild explains how the HuCAP model relies on annual appropriation bonds issued to

external investors by the Minnesota legislature.18 The cash generated by the bonds is then

deposited into a state-maintained performance pool, where it held to pay non-profit service

providers if they meet performance targets. Concurrently, a working capital pool is established

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through a combination of foundation program-related investments (PRIs), bank community

development corporations (CDCs) and other external investors. This pool provides working

capital 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 state

iv The HuCAP model is dependent on annual appropriation bonds (more accurately defined as annual appropriation pledges by the Municipal Securities Rulemaking Board) and these “bonds” are a type of financing that commits the state to make payments “to the extent that moneys are budgeted and appropriated on an annual basis by the issuer’s or 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)

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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 to

begin its first SIB experiment, Massachusetts is working on plans directed through the executive

branch. On January 18, 2012 Massachusetts became the first state to issue a competitive

procurement meant to obtain services using social innovation financing contracts.20 The Request

for Response sought information for using social innovation financing to address chronic

homelessness and juvenile justice in the Commonwealth. Specifically, Governor Duval Patrick

cited “pay for success” contracts and social impact bonds as possible avenues to “partner with

social 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

Less is known about how Massachusetts may adapt the generic SIB model. According to one

report, the state’s approach “might slice the expected revenue stream into tranches, offer the

lower-risk tranches to foundations, and pitch the premium tranche to investors with the highest

appetite 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, Social

Finance has published a number of guides and resources for would-be SIB stakeholders. In “A

Technical Guide to Developing Social Impact Bonds,” Social Finance outlines the broad

prerequisites needed to establish a contract between a public sector payer and private sector

investors.22 In his report for the Center for American Progress, Dr. Liebman incorporates

elements of the Technical Guide to list five criteria that must be met to increase chances for

success 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 or

counterfactual and (5) Unsuccessful performance must not result in excessive harm. The March

2012 CAP report further adds that SIBs require “government to place few, if any, controls on the

way that the external organization accomplishes the outcome,” meanwhile the government would

be expected to “cooperate with the external organization so that it is able to take the actions

necessary to achieve the outcome—for example, by ensuring access to relevant data.”24

The funding challenges associated with the intervention at Peterborough prison are not

unique to the United Kingdom. The U.S. federal budgeting system suffers from many of the

same aliments related to the federal appropriations process. For instance:

13

Appropriations for social programs, especially preventative services, are contingent

upon one- or two-year cycles. In the federal budget, most appropriations are available

for only the fiscal year specified in the enacting clause of the appropriations act.

Exceptions are made through multi-year and “no-year” appropriations. Multi-year

appropriations are those that are available for obligation for a definite period of time in

excess of one fiscal year; no-year appropriations are available for obligation for an

indefinite period.25 A no-year appropriation is usually identified by appropriation

language such as “to remain available until expended.” No-year appropriations are

generally reserved for research & development, procurement of construction projects and

large information technology implementations, or revolving or enterprise funds. These

kinds of appropriations provide agency-level flexibility; however, they also undermine

the ability of Congress to provide oversight, regarding the time availability of funds. For

this reason, Congress is not usually keen on including large numbers of these kinds of

appropriations each year.

Funding streams that support preventative interventions are often different from

the programs for which cost savings are intended to accrue. Improving childhood

obesity, for example, could positively impact the bottom line of several other programs

spanning the Department of Health & Human Services and the Education Department.

However, success and failure of such a program is not easily attributable, and so, funds

may become difficult to obtain on a consistent basis.

There is an inherent inflexibility built into most grants. Agencies cannot directly

control behavior of grant recipients. So in much the same way that Congress

appropriates funds with explicit rules governing the amount and purpose of expenditures,

14

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 policymakers

that SIB models can be tested through federal programs. In a factsheet accompanying President

Obama’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 are

employing innovative new strategies to help ensure that the essential services of government

produce their intended outcomes… Pay for Success is an innovative way of partnering with

philanthropic and private sector investors to create incentives for service providers to deliver

better outcomes at lower cost—producing the highest return on taxpayer investments.v The

concept is simple: pay providers after they have demonstrated success, not based on the promise

of success, as is done now.”27

Through the FY 2012 budget, President Obama pledged $100 million across seven

program areas located within the Department of Education, the Social Security Administration,

the Department of Justice, the Department of Labor and the Corporation for National and

Community Service. 28 Proposed projects ranged from workforce development and juvenile

justice 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’s

FY 2013 budget, $105 million would be available for agencies to demonstrate Pay for Success

v It is important to note that the Obama administration uses the phrase “Pay for Success,” or PFS projects, to describe its work in this arena, but thus far, federal models are adaptations of the generic SIB model.

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projects. Appendix A provides a crosswalk between FY 2012 and FY 2013 budget proposals

and an examination of the budget text reveals the primary appropriation mechanism being used

to 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 or

appropriations account. And, generally, 31 U.S.C. § 1552(a) gives any fixed appropriation

without a predetermined period of availability a five-year lifespan, after which time, any

remaining balance in the fund (whether obligated or unobligated) is cancelled and unavailable

for obligation or expenditure for any purpose.29 In his FY 2012 and FY 2013 budgets, the

President uses the standard language for no-year appropriations (e.g. “may remain available for

disbursement until expended”) and adds the phrase “notwithstanding 31 U.S.C. § 1552(a).” This

combination of phrasing is then followed by a proviso that any deobligated funds are

immediately available for some related purpose. Unfortunately for SIB advocates, such language

has never made it into law (at least where SIBs are concerned) and so federal agencies are

constrained by current language and protocol. Given this, two agencies are making good on the

president’s pledge to set up pilots under existing authority: the Department of Labor, the

Department of Justice.

In February 2012, the Department of Labor’s Employment and Training Administration

held a listening session to describe to potential stakeholders how a portion of the Workforce

Innovation Fund could be used to test a Pay for Success financing model. The Workforce

Innovation Fund “invests in programs that support, evaluate and enhance workforce investment

strategies, particularly for vulnerable populations,” according to a description on the Department

of Labor website.30 Up to $20 million is available to pilot the funding approach, but details will

16

not be available until a second Workforce Innovation Fund solicitation is issued sometime in

April 2012.31

Meanwhile, the Department of Justice is looking to take a page from the Peterborough

prison playbook. The DOJ’s Bureau of Justice Assistance has the most developed PFS plans of

any federal agency and recently they announced plans to give priority funding consideration in

three Second Chance Act (SCA) grant solicitations to qualified applicants who incorporate PFS

models in their program design.32 SCA Programs are designed to help communities develop and

implement comprehensive strategies that address challenges posed by offender reentry and

recidivism reduction. The Bureau of Justice Assistance held a briefing for stakeholders on

March 6, 2012 to explain how PFS models could fit into three SCA programs and explained how

the 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 of

working capital to pay for direct services or to reimburse for outcomes achieved during the

project period.33 However, statutory constraints do not allow SCA funds to be used to pay a

return on investment to organizations that provided working capital.34 This is due mainly to the

fact that SCA grants can only be awarded to units of state and local or tribal governments. In

fact, 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

Due to these budgetary constraints, the SCA-envisioned model looks, again, slightly

different than the generic SIB model. In Figure 4, the federal government awards money to a

state/local or tribal governmental agency that then works with an intermediate organization to

oversee service providers and facilitate additional working capital from private investors. SCA

funds have to be used as working capital in this model, so it is envisioned that savings would be

confined to state/local or tribal level governments, who in turn, require less from federal

government 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 on

investment (if service providers achieve quantifiable cost reductions) but that money must be

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separate from the matching funds offered by the state, local or tribal governments. It was not

evident that the DOJ would have any role in the final arbitration of incentive or ROI, due to the

prohibition of such uses with SCA funds. Submission deadlines are April 24, 2012, so it is not

yet 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 in

Peterborough, England. The intermediate organization could play a host of roles from using its

own funds to pay service providers, or it could act as one of the service providers itself. The

governmental entity also has potential for variation, depending on budgeting statute, to be further

removed from (Department of Justice) or more involved with (Minnesota) private sector

investors. While there may be program or agency-specific statutes dictating how the SIB model

looks, the Obama administration has relied on no-year appropriations language buttressed against

31 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, additional

areas of federal programs must examined.

Beyond recidivism, areas often cited as likely candidates for SIBs include kindergarten

readiness, employment services for hard-to-employ groups, college retention services, reducing

homelessness, 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 the

constraints of the federal appropriations process. Advocates of the SIB model may do well to

look beyond the typical departments of social programs, to areas of the federal budget that have

more flexibility, but could also have a positive impact on populations in need.

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Social Impact Bonds and the US healthcare system

Several conditions necessitate a deviation from status quo healthcare spending. The

Centers for Medicare & Medicaid Services (CMS) says that it spent $549.1 billion on benefits

for its Medicare Part A and Part B in 2011.35 Taken in a broader context, expenditures in the

U.S. on healthcare exceeded $2.6 trillion in 2010, which translates to $8,402 per person or 17.9

percent of the nation's Gross Domestic Product.36 Many observers agree that US spending on

healthcare has been exacerbated by a fee-for-service healthcare market that does not encourage

proper incentives. Rather than pay doctors according to outcomes, i.e. improved wellness for

patients or preventative care, Medicare and insurance companies pay doctors according to how

many 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 and

Affordable Care Act (ACA) was enacted March 23, 2010. The ACA includes a number of

provisions designed to improve the quality of Medicare services, support innovation and

establish new payment models. The intent of these efforts is to achieve the so called, three part

aim: better health, better health care, at lower costs per beneficiary. Specifically, under section

3021 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, while

preserving or enhancing the quality of care” for those who get Medicare, Medicaid or CHIP

benefits.37

In the year since it launched, the Innovation Center has introduced over a dozen

initiatives across four “provider pathways:” Accountable Care Organizations; Enhanced Primary

Care; Bundled Payments for Care Improvement and Duals Initiatives and Models. According to

20

its FY 2012 budget justification, CMS says the ACA provides for the Innovation Center, “$10

billion in budget authority for fiscal years 2011 through 2019 with not less than $25 million to be

made available each year for the design, implementation, and evaluation of innovative payment

and service delivery models to reduce program expenditures while preserving or enhancing

quality of care.”38 Because it is a new component of CMS, its Funding History had a single line

item: $5 million in 2010. The FY 2013 budget justification for the Innovation Center does not

disclose much about how the 16 initiatives had been performing vis-à-vis its budget, instead

promising “actual [performance metrics] data for FY2011 and targets for future years” in FY

2014 budget documents.39 This makes it difficult to tell how much work the Innovation Center

has done to quantify its efforts. The FY 13 budget justification speaks in general terms about its

operational activity, but there are no monetary specifics. The President’s Budget Appendix for

HHS is slightly more revealing, indicating that the Innovation Center has spent $733 million in

FY 2012, while obligating around $1.3 billion.40

Turning to the text of the legislation, the Innovation Center is in a unique position from

an appropriation standpoint, because the ACA provided $10 billion for the FY2011-FY2019

period—and $10 billion for each subsequent 10-year period.41 Further, the law states that funds

made available subsequent to fiscal 2019 “shall remain available until expended;” in short, they

are no-year funds.42

Previously, it was stated that SIBs would have trouble working in funding environments

where:

Appropriations for social programs, especially preventative services, are contingent upon

one- or two-year cycles.

21

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, an

SIB-based demonstration project through the Innovation Center would not need additional

Congressional action, nor is it contingent on the President’s Budget being adopted through the

designated budgetary process. The provisions currently established in Second Chance Act grant

funds, 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 Innovation

Center 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

current law. Turning back to Dr. Liebman’s barriers to social innovation, the CMS Innovation

Center is in an ideal position inside CMS to bypass most, if not all, barriers.

Barriers CMS Innovation Center

1Government funding is insufficiently focused on results and performance

All of the pilot projects under way through Innovation Center are focused on results and performance

2

Inadequate performance evaluation allows ineffective programs to persist

Performance evaluation sits at the heart of Innovation Center culture and would likely be a primary driver of pilot project parameters

3The proof-of-concept process for social innovations is slow

One of Innovation Center’s main aims was to help address this problem

4Innovation is risky and public officials are wary of failure

Since CMS Innovation Center works under an "incubator mindset" it is not afraid to "fail fast" as the cliché goes

5

Preventive programs often don’t get funded out of the budgets they help reduce

Another focus of Innovation Center is to better tie outcomes to funding and then to align incentives and budget appropriations. Identifying perverse incentives and testing alternatives is also a main goal

6

Performance-based funding requires upfront investments and the ability to absorb risk

The Innovation Center’s $10 billion appropriation over ten years is meant to help provide start-up capital to identify projects to scale

After understanding the basics of social impact bonds and understanding how

governments at federal, state and local levels are looking to leverage them, their potential

strengths and weaknesses can be better understood. While there is great promise in their

application to make government smarter purchasers of social services, there is equal challenge in

their deployment – be it due to funding and appropriation norms or due to finding appropriate

populations and / or interventions.

23

President Obama’s FY 2012 and FY 2013 budgets would test the pay for success model

in modest ways, but unless the needed changes are made to the proposed agencies’ current

funding mechanisms, there is little chance the models will work. Rather than forcing PFS pilots

through ill-suited programs, the Obama administration should look to test such models in areas

of 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 Medicaid

and 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 traditional

government funding to impact larger segments of the budget and to develop superior methods of

program 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 kind

of lasting effect on government programs. However, through the process of developing and

maintaining an SIB model-funded program, government is likely to learn valuable lessons in

program management, procurement, program evaluation and possibly how to better scale-up

promising social programs.

24

ENDNOTES

25

1 U.K. National Audit Office, “Managing offenders on short custodial sentences,” 10 March 2010 http://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 innovation and 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 Innovative New 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 Advance Social Good,” Social Impact Inc., February 2012 http://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. Morgan Social 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 for Catalyzing 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 for Performance Act of 2011” 23 March 2011 https://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 and the National Conference of State Legislatures (June 2011) http://www.ncsl.org/documents/sfn/SteveRothschild11.pdf 18 Steven Rothschild, The Non Nonprofit: For-Profit Thinking for Nonprofit Success, San Francisco: John Wiley & Sons, January 201219 H.F. No. 681, 1st Engrossment – 87th Legislative Session (2011-2012) “Minnesota Pay for Perforamnce Act 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 Success' Social Innovation Contracts,” Executive Office for Administration and Finance, 18 Jan 2012 http://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 2011 http://www.socialfinance.org.uk/sites/all/modules/pubdlcnt/pubdlcnt.php?file=/resources/social-finance/Technical_Guide_Overview.pdf&nid=305 23 Liebman (pgs. 3-4, 18-25)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,” IBM Center 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, Fact Sheet, “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 periods http://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 FY 2012 Competitive Grant Announcement; Reentry Program for Adult Offenders with Co-Occurring Substance 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 the Department of Justice's (DOJ) Second Chance Act Solicitations,” 6 March 2012 http://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 Medical Insurance Trust Funds “2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and the Federal Supplementary Medical Insurance Trust Funds,” (Washington, D.C.) 23 April 2012 http://www.treasury.gov/resource-center/economic-policy/ss-medicare/Documents/TR_2012_Medicare.pdf 36 Martin, A.B. et al. January 2012. Growth in US health spending remained slow in 2010; Health share of gross 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 within CMS, (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 Year 2012 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 Year 2012 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 and Medicaid 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 on Health Reform (Washington, D.C.) 23 March 201242 Public Law 111-148, SEC. 3021. Establishment of Center for Medicare and Medicaid Innovation within CMS, (f)(B) & (C) (Washington DC: GPO 2010) http://www.gpo.gov/fdsys/pkg/PLAW-111publ148/pdf/PLAW-111publ148.pdf