Understanding Government Key to Pay For Success

So far the discussion on this blog about Pay For Success has focused on the challenges associated with results based funding of social programs. These challenges are common to philanthropic and government funders. But Pay For Success also faces challenges unique to government. Reader Daniel Stid, a Bridgespan employee who writes a blog for them about the impact on nonprofits of government fiscal problems, adds this comment to the debate:

“I’ve really appreciated the discussion this week on “pay for success” and concur that this is a promising but very new idea so we shouldn’t kill the seedling by continually pulling it up out of the ground to examine it.

The question is, how can we help it take root as an experiment that we can learn from? In this regard I am struck by how the discussion of this approach, as with other outcome- or performance-based contracting schemes typically focus on the challenges in the social sector of delivering (identifying and tracking the right outcomes to measure, avoiding creaming, etc). But there are as many if not more barriers on the government side of these contracts that also need to be overcome.

One of the biggest obstacles here for example is the fact that while government agencies might say they want to contract and pay for outcomes, they don’t want to give up the specification and tracking of inputs and outputs along the way toward those outcomes. And in many areas (e.g., child welfare) they are obliged by law and policy and public scrutiny to insist on inputs and outputs.

It is also much easier for government contracting officers to specify and count beds filled and people served than it is for them to assess whether the people in those beds end up stably housed or sober or employed two or three years down the road, hence the attraction to government of traditional input/output vs. outcome/success based contracts.

And then there is the broader problem of how the government is organized, in very siloed agencies, and that the savings arising from success in the application of one prevention program may well accrue down the road in the budget of another agency, thereby making it all the more challenging to align the incentives and planning for government (whether it be at the federal, state, or local level) to contract so as to pay for success, as reasonable as it might seem to do so.

One potentially highly leveraged investment a philanthropist could make in this regard would be to support a government body in taking stock of and developing and documenting ways to overcome these barriers. It might seem counterintuitive for philanthropy to invest in government capacity-building in this regard, but given the fiscal reckoning that will be unfolding for the foreseeable future at all levels of government this type of investment is not likely to be made internally with public funds. Outside support in developing and disseminating this research would also provide continuity over time as particular administrations and political support for this idea might wax and wane.”


  1. George Overholser says:

    Daniel, I agree strongly that understanding government is a critical piece to the Pay For Success puzzle. There are many many layers of complexity and red tape to wade through. On the other hand, performance-based contracting is certainly not new to government — there are plenty of contingent payment schemes around achievement in workforce development job placements, for example. Third party financing is also already quite common among government and providers. And third party outcome evaluation also exists quite prominently.

    The trick, it seems, is to combine these semi-proven techniques into a single package.

    Unfortunately, very few of today’s social sector statutory and regulatory schemes currently allow (a) multi-year spending commitments or (b) commitments that are contingent in any way.

    Therefore, most Pay For Success arrangements will require significant policy work before they could be enacted.

    It may be worth mentioning some of policy work already under way.

    At the federal level, members of Obama’s Office of Management and Budget (OMB) staff have drafted language into the 2012 proposed budget whereby powerful waivers could be granted to federal spending stream regulations, so long as the federal agency involved can demonstrate to the OMB that the use of funds would comply with the OMB’s Pay For Success guidelines. Without a waiver, so-called OMB circulars forbid multi-year and/or contingent commitments.

    These OMB Pay For Success guidelines have not yet been drafted. But, for example, if someone who lords over a federal “innovation” spending stream were to design a multi-year Pay For Success program that matched the descriptions in the guidelines, then the OMB would grant a waiver allowing the spending contract to extend over multiple years, and to be contingent in nature.

    A second innovation is being contemplated in Minnesota. There, under the leadership of Steven Rothchild, a local business leader, the legislators will soon vote upon the creation of a new “moral obligation bond” issuance. This bond would raise a pot of money form the public that would be available to pay out rewards to providers who hit their performance goals. As a generic moral obligation bond, it would automatically be multi-year in nature, and governance of its use would fall outside of the normal (highly political) annual budget scoring process. A panel of economists would help to govern the release of funds from the bond fund, based on whether they are convinced that fiscal savings actually take place.

    The Federal waiver approach and Minnesota bond fund are fairly sweeping. My hunch, though, is that the early experiments will happen when individual PFS projects gain popularity in certain statehouses, and when, for these very specific programs, legislators put in the work to carve out specific project-related statutes during the coming legislative sessions. With any luck, the small number of political champions who marshall these changes will bring encouragement to others who might want to follow suit in the future.

    Finally, you mentioned the problem of silos, where one branch of government may be reluctant to send monies to another. I have heard first hand that these dynamics are VERY strong. After years and years of battling for scarce budget, government departments seem to be almost hard wired against sharing of this kind.

    To me one of the big attractions of the PFS arrangement is precisely because the third party makes it easier to accomplish inter-government transfers. For example, if a school system raises attendance, it reduces the number of youth “on the street”, and therefore may also reduce expenses in the justice department. Suppose the school system therefore went knocking on the door of the justice department. In all probability, the justice depart would say “no”.

    But PFS is different. Under a PFS arrangement, philanthropists (not school superintendents) would approach the justice department and offer to do “something that will lower the number of kids on the street”. In return, they would like the justice people to pay… but only if it works. In other words, justice would NOT be asked to send money to the school system. Instead, they would have a contingent contract with private philanthropists for work done by nonprofits to reduce the number of kids on the street.

  2. Daniel Stid says:

    George and Sean, thanks for the follow ups to my comment yesterday.

    Your comments resonate. While the OMB initiative is promising, I am more optimistic about the opportunity to get traction with this sort of funding mechanism at the state or local level (per your MN example George), taking advantage of the”laboratories of democracy” approach that worked reasonably well in welfare reform for example. Given the smaller scale and (at times) the greater problem-solving vs. political orientation at these lower levels of government, enterprising governors / mayors / legislators / council reps / advocates might well stand a better chance of overturning traditional ways of doing business to generate powerful examples of this idea working in practice.

    I also concur that one of the advantages of the social impact bond approach vs. traditional performance-based contracting is that you cut through the problem of having the government being reluctant to cover the necessary up front costs for preventative work when the outcomes that matter are maybe 2-3 years down the road. As you point out, the initial outside funding would also mitigate the “but that is not our department” barrier that constrains conventional performance-based contracting where up front investments and subsequent savings are spread awkwardly across agencies. But I imagine there would still likely need to be some sort of inter-agency back and forth in the schools — justice department example you describe, in getting the initial standards of success agreed too and then confirming down the road whether they have been met. Not an insurmountable barrier but often the sort of thing where good ideas break down in practice.

    A broader complication on the government side, which just “is what it is,” would be what happens if the schools systems in question see dramatic cutbacks in funding (as almost all have across the country recently) due to the broader budget situation. In this instance the well honed interventions funded by philanthropy are likely to swamped by the countervailing rip tide in baseline funding in the system. Given the fiscal outlook at all levels of government, that will likely be a recurring challenge and risk to manage for philanthropists seeking the returns from this novel form of social investment.