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Taking Pay for Success Financing to the South

An analysis of the viability of pay-for-success initiatives in South Carolina shows that this new type of financing can work in more rural, "red” states.

We’ve heard a lot about social impact bonds and pay for success financing (PFS), where philanthropic funders and private investors provide capital for social programs, and government pays only if the initiative achieves agreed-upon outcomes. Most PFS activity has been in “blue” states with large urban populations, such as New York and Massachusetts, but many observers have wondered whether PFS financing would also appeal to “red” states.

Based on our experience in South Carolina, the answer is yes.

The state has taken steps to pursue PFS financing by issuing a request for information at the end of 2013—the first in the South and the first by a red state. If the PFS transaction is completed, it will likely be the first to focus on health outcomes. On behalf of the Institute for Child Success (ICS), we conducted the feasibility study that informed the state’s effort. Both our analysis and the response it generated have convinced us that PFS is a viable way to improve health outcomes in the South, in nonurban areas, and in conservative states.

The Institute for Child Success is committed to a sustainable system that ensures the success of all young children, prenatal to age five. In 2013, we set out to determine if PFS could help us scale and sustain one early childhood intervention—the Nurse-Family Partnership (NFP)—in South Carolina. This is an evidence-based program in which nurses provide services and support to first-time, low-income mothers in visits to their homes.

Our analysis showed that PFS financing is a feasible way to improve outcomes for South Carolina’s mothers and children. We found that:

  • NFP produces measurable improvements to the health, education, and prospects of the families it serves.
  • The savings produced from these benefits far exceed the program’s cost—in fact, NFP produces net savings to government.
  • There is a huge demand, and the initiative could expand to meet it (it could accept only 568 new entrants in South Carolina last year out of an eligible population of 11,500).
  • The program has viable outcome metrics, including reduction in preterm birth rates and emergency department visits, that could be used as payment terms for a contract within a reasonable timeframe for investors.
  • There are several possible PFS financing structures that mix commercial and philanthropic capital.

NFP can impact health, child maltreatment, school readiness, and future crime and drug use. But since investors prefer simplicity and predictability, we believe it is best to focus on a single outcome when considering payment terms. Our study focused on health for several reasons, including South Carolina’s strong interest in reducing Medicaid payments, the state’s poor birth outcomes, and the relatively short timeframe in which the program achieves health outcomes. Specifically, we suggested reducing preterm births as a possible outcome that the state could pay for under a PFS contract. While the savings from preterm births alone do not cover the cost of the program, it is nonetheless a viable PFS payment term, because it is important to the government, data is collected on it, and it is a bellwether for longer-term outcomes.

The response to the idea of PFS and to the study’s findings showed that Republican governors and legislators see value in this financing mechanism. We worked closely with South Carolina state leadership and spoke with several legislators as we conducted the feasibility study. They were interested in PFS financing because:

  • It helps the state use taxpayer dollars more effectively to improve the health of South Carolinians in the state’s Medicaid program.
  • It uses private-public partnerships to meet South Carolina’s challenges, mobilizing multiple sectors to work in concert to improve specific outcomes.
  • It focuses government on paying for what works.

South Carolina, like many other southern and rural states, does not have an abundant supply of large philanthropies and investment banks, so we wondered whether it would be able to attract PFS investors. As we completed our feasibility study, we were encouraged to see local banks and local foundations attend working group meetings and express interest in investing. National banks and foundations also showed interest in investing in South Carolina after seeing that the government was serious about PFS and that there was a chance to help communities that are truly in need.

While it remains to be seen whether South Carolina completes a PFS project, and whether the project improves the health of the state’s mothers and children, we are optimistic.

As the least healthy part of the country, the South stands to benefit the most from interventions that improve health outcomes. As government, foundations, service providers, and investors continue to explore the potential of PFS, let’s be sure to consider all states—red or blue, urban or rural, north or south—as potential beneficiaries.

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