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Social Impact Financing – Pay for Success

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Pay for Success (PFS) financing models, sometimes referred to as “social impact bonds,” are cross-sector partnerships in which private funders provide working capital to scale an evidence-based intervention through an agreement tying their repayment to outcomes produced by the intervention. In addition to the upfront funders, a PFS agreement typically involves a government agency as the back-end payer, an independent evaluator to measure the outcomes, an intermediary organization to develop the transaction, and one or more service providers to implement the intervention. With origins in the UK, PFS transactions arrived in 2012 to the US, which now has the largest PFS market in the world at over $200 million invested in social issues such as early childhood education, homelessness, recidivism, and workforce development.

PFS models present an opportunity to shift risk to the private market to scale and replicate effective, preventive programs with the goal of transitioning to sustainable funding from the back-end payer beyond a successful transaction. Generally, optimal interventions for PFS are those that produce short- to medium-term outcomes that clearly benefit one payer. Homelessness and criminal justice, for example, are issues that typically produce savings within a short period for city or county government agencies when addressed effectively. While not all outcomes in PFS projects necessarily produce direct cashable savings to a payer, they are usually associated with at least social, non-fiscal benefits that a payer values.

Addressing lead poisoning through PFS financing is possible with the right combination of partners, target population, and political will. One of the main challenges in structuring a PFS transaction around lead poisoning is the fact that its effects and costs are spread across sectors stewarded by many potential payers over an extended time horizon. Lead poisoning impacts medical outcomes associated with direct and indirect costs of care as well as non-medical outcomes associated with special education, criminal justice services, and lifetime earning potential. Services related to medical outcomes fall under the responsibility of healthcare entities such as Medicaid and medical providers, while those for non-medical outcomes may be under the jurisdiction of multiple levels of government. GHHI’s publication Pay for Success for Lead Poisoning Prevention identifies the vast potential return on investment that a large-scale lead-focused PFS project could have, with conservative estimates at nearly $140 million in cashable savings for a conceptual 5,000-home project.1

As noted in the CDC’s Pay for Success: A how-to guide for local government focused on lead-safe homes, PFS would fit best with a primary prevention model since that would produce more cashable savings in a shorter timeframe than would a secondary prevention model aimed at mitigating damage for children already lead-poisoned.2 Using Cleveland as an example, the how-to guide outlines a step-by-step process a government and community at the local level would go through to develop a lead-focused PFS project. In late 2017, Cleveland partners decided to turn the project into reality and begin structuring a PFS transaction to remediate 10,000 homes in ten years. It is one of the largest PFS transactions in development, with initial figures projecting a $200 million return on a $159 million upfront investment.3 More and more state governments are enacting legislation at the state level to set aside funds for PFS transactions, with some releasing “rate cards” detailing prices they are willing to pay to any service provider for outcomes they can produce through a robustly evaluated intervention. With a committed government payer, a rate card approach for lead could be a more efficient route to a transaction than more traditional PFS development paths.

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