Michigan tests 'pay-for-success' model for diabetes prevention

A new type of financing is linking private investors who want to do good — and make some money in the process — with not-for-profits looking to get upfront funding for programs where they're paid for results.

The model is set to get another early test drive in Michigan, expanding a proven diabetes prevention program offered by the National Kidney Foundation of Michigan in six Metro Detroit and West Michigan counties.

For not-for-profits, the model promises a new funding stream outside of traditional grant-making and philanthropy — if they can deliver.

Through the pay-for-success model, known as "pay for success," private investors front the costs to scale a program that's shown some degree of success in tackling a persistent social issue. That investment is often called a "social impact bond."

Back-end payers such as the government or health insurance companies pay for the services on the back end, returning money to investors — but only if the charity meets predetermined benchmarks for performance. Hence "pay for success."

The goal is lower-cost, preventive interventions that can save money for the payer in the long term.

The Ann Arbor-based National Kidney Foundation is one of three social services agencies chosen nationally by New York-based Local Initiatives Support Corp. to receive technical assistance to help it launch the model.

Its pay-for-success program will follow another launched in Michigan last August to improve outcomes for at-risk mothers and babies and about a dozen other projects around the country.

There's a plethora of evidence that shows the diabetes prevention program works in terms of spurring people to lose weight and to increase their physical activity, said Charlene Cole, director of program operations.

By financing expansion of the program through a social impact bond, everybody wins, she said.

"It will save health insurers money; the Kidney Foundation will be happy because it's serving more people, and investors will get some small return on their investment."

The first program financed through the model launched in the U.S. in 2012, two years after its emergence in the United Kingdom.

Since then, more than a dozen projects have launched around the country addressing issues ranging from homelessness to recidivism to early childhood education. Another 50 are in development, according to Payforsuccess.org, a site that provides education and information on pay for success and is managed by the New York-based Nonprofit Finance Fund.

Traditionally, contracts or grants to support social service programs focus on short-term results such as the number of people coming through or graduating from a training program.

Social impact bond models seek longer-term outcomes such as the ability of a job training graduate to get a job and the amount of money he is able to make as a result of the program.

Investors include commercial banks, community development financial institutions, foundations, and theoretically, individuals, said Jennifer Oertel, who is group leader of tax-exempt organizations and the impact investing practice at law firm Jaffe Raitt and a member of the advisory committee on impact investing for the Case Foundation.

Impact investing has become a hot topic, she said.

"People want a return on their money and want to create social good, so banks and financial advisers are looking for products to do this."

Though the model is risky for investors, "We anticipate this is going to just increase with the wealth shift to millennials," Oertel said.

Michigan was one of eight states chosen in a national competition in 2013 to receive technical assistance from the Social Impact Bond Technical Assistance Lab at Harvard Kennedy School to explore tackling persistent social problems with pay for-success contracts funded by social impact bonds. The Rockefeller Foundation and the Laura and John Arnold Foundation supported the technical assistance.

After nearly three years of development, the state's first pay-for-success program launched last August to expand Spectrum Health's Strong Beginnings program through a pilot that will serve an estimated 1,700 families in Kent County, with the goal of reducing preterm birth and rapid repeat pregnancy.

The program focuses on improving health and early childhood development outcomes for high-risk mothers and their babies through home-visitation, community programs and better coordination of care throughout pregnancy until the child's second birthday. Eight community agencies, including the state population-based Maternal Infant Health program, are collaborating on the program, which aims to improve maternal and child health among African-Americans and Latinas and eliminate racial disparities in birth outcomes.

The National Kidney Foundation is now trying the model out, with LISC's help, to expand a diabetes prevention program it has offered since 2012.

About 1,700 people at risk for developing diabetes have enrolled in the diabetes prevention program since its launch, said Arthur Franke, senior vice president, chief science officer at the National Kidney Foundation.

Nearly half of those in the program lost more than 5 percent of their body weight, and participants increased their level of physical activity to an average of 221 minutes per week. Both are proven to reduce progression to Type II Diabetes.

But the people at greatest risk, low-income people not covered by Medicare or private insurance, don't have access to this program, because Medicaid insurers don't cover it, Franke said.

Through the pay-for-success model, the National Kidney Foundation plans to expand the program to at-risk, low-income populations in Oakland, Wayne, Macomb, Genesee, Kent and Muskegon counties.

The National Kidney Foundation is seeking $1.5 million to expand the program, Franke said, with a goal of adding 1,000 new people annually during the three-year program.

LISC is assisting the foundation in setting up an agreement with investors, a third-party validator that measures the success of the program based against the outcomes promised and the back-end payers that would benefit from the cost savings.

Private investment in the program is likely to include a mix of grants, recoverable grants, junior debt and senior debt funding provided through banks, community development financial institutions, businesses and/or foundations, said Anna Smukowski, LISC's pay-for-success program manager, in an email.

Investors are interested in the model, she said, because it provides a forum for impacting investing which produces social and/or environmental returns, as well as a financial return.

It aligns with the mission-orientation of foundations seeking to improve the quality of life for people, community development financial institutions and philanthropic arms of banks, and through measurement of program effectiveness, it ensures investments measurably improve the lives of the people served, she said.

Medicaid health plans like Meridian Health, Molina Healthcare, Health Alliance Plan and others that stand to gain cost savings from people not progressing to diabetes are expected to pay on the back end, Franke said.

"We're wanting to talk to any health plans that offer Medicaid. ... We'd like to demonstrate that the program has proven success with that population."

As interest in pay-for-success initiatives and social impact bond programs have spread in recent years at the local, state, and federal levels, results have been mixed, according to the National Council of Nonprofits.

The new funding mechanisms are not the cure-all remedy for every social problem or public funding shortfall as promoted by some, and they're not the guaranteed disaster others call them, the council said.

Pay-for-success models can be considered in instances where data can be measured accurately, said David Thompson, vice president of public policy for the National Council of Nonprofits, in an email. The initial target populations – prison recidivism rates, early childhood development are ideal because they have large populations and existing sets of data.

But the challenge is that not all things can be measured, he said.

"The biggest concern about pay-for-success programs is that worthy interventions and innovative approaches are ignored when an outsider party cannot identify in advance which metrics will show success," Thompson said.

"The result can be that the easily measured items get funding and the best solutions are left out of consideration."

Traditionally, contracts or grants to support social service programs focus on short-term results such as the number of people coming through or graduating from a training program.

Social impact bond models seek longer-term outcomes such as the ability of a job training graduate to get a job and the amount of money he is able to make as a result of the program.

Investors include commercial banks, community development financial institutions, foundations, and theoretically, individuals, said Jennifer Oertel, who is group leader of tax-exempt organizations and the impact investing practice at law firm Jaffe Raitt and a member of the advisory committee on impact investing for the Case Foundation.

"Michigan tests 'pay-for-success' model for diabetes prevention" originally appeared in Crain's Detroit Business.