Pay for Success—Social Impact Bonds

Pay for Success contracts using social impact bonds are a promising new approach to government financing of social service programs.  Pay for Success offers governments a leadership tool to overcome three barriers—lack of performance assessment, under-investment in prevention, and inability to collaborate effectively with service providers around improving systems—and by doing so, has the potential to speed up progress in addressing challenging social problems.

Pay for Success contracting using social impact bonds combines two tools—a performance contract and an operating loan or social impact bond. Under the performance contract, the government purchases social services aimed at a specific target population. Instead of paying directly for the quantity of services delivered, the government pays based on the outcomes that are achieved by the services—e.g., the number of ex offenders prevented from returning to prison, the number of unemployed individuals who succeed in finding stable employment, or the reduction in low birth weight births.  These outcomes are measured by an independent evaluator.  The parties to the contract agree to the target outcomes, the metrics that will be used to evaluate whether the outcomes were achieved, the method of evaluation, and a payment schedule. The government commits to pay for outcomes successfully achieved. If the intervention fails to achieve the minimum target, the government does not pay.  Payments typically rise for performance that exceeds the minimum target, up to an agreed-upon maximum payment level.  In most cases, performance is rigorously measured by comparing the outcomes of individuals referred to the service provider relative to the outcomes of a comparison or control group that is not offered the services – so the payment is based on the impact of the intervention. 

Social impact bond/operating loan—A social impact bond is not a “bond” but rather a loan from private funders. Most social service providers do not have the financial capacity to deliver services, wait several years for performance to be assessed, and only then receive repayment for the services that were delivered.  And most are not positioned to absorb the risk associated with a large portion of reimbursement being based on performance. So PFS projects generally include an operating loan from private funders who provide upfront capital in exchange for the lion’s share of the government payments that become available if the performance targets are met. If the targeted level of outcomes is achieved, the loan is repaid with interest from the government’s performance payments. If the minimum outcomes are not achieved, investors can lose all of their principal.  

But PFS projects backed by social impact bonds are much more than a financing device.  PFS projects are catalyzing systems reengineering in a way that rarely occurs with standard public sector management practices.  Stakeholders, including government, providers, and philanthropists, are bound together in multi-year collaborations that rely on more effectively using data and systems re-engineering to focus on outcomes for the individuals served.

New York State criminal justice PFS project: As an example, we have seen New York State’s criminal justice PFS project lead to important transformations in the way that the state Department of Corrections interfaces with the service provider. Prior to the project, the service provider was responsible for finding, contacting, and enrolling eligible individuals. Under the PFS project, the state defines the entire target population and delivers referrals directly to the service provider, making it much harder for at-risk individuals to get lost in the transition out of prison. The state then holds the provider accountable for the outcomes across the entire treated target population and meets with the provider frequently to look at real time data on operations and troubleshoot problems in program take up. It also monitors ex-offender participation in job training by parole officer and responds when the data reveal that an individual parole officer has a large share of cases not participating in job training. To learn more about our New York PFS project, read here

To learn more about the PFS/SIB model, see our Guide for State and Local Governments here.