Pay for Success: Initial Promise, Unmet Potential

Pay for Success (PFS) is a contracting and financing mechanism that was originally intended to:

  • Catalyze the achievement of impactful social outcomes by leveraging the collective energies of the philanthropic, nonprofit, public, private, and academic sectors;

  • Understand and capture what services and supports work best for communities in need through rigorous evaluation methodologies; and

  • Facilitate the use of more preventative social service programming by identifying and redirecting demonstrable cost savings and avoidances from such programs.

The first Pay for Success transaction was launched in 2012 in the United States. Since this first deal, approximately 25 deals[1] have been launched in the United States with estimates suggesting well over 75 projects ending in either the feasibility or deal construction phases. While significant attention and resources have been invested into launching and growing the PFS field from the public, private, and philanthropic sectors, there has yet to be the level of uptake needed to productively and critically advance the field.

Several key obstacles have prevented widespread adoption of the Pay for Success model, including:

  • An overall lack of service provider support in initiating, negotiating, and performance managing nimbler, less complex Pay for Success projects.

  • An overly rigid PFS deal structure that has not adequately considered the ongoing funding, contracting, and operating realities that the majority of nonprofits face when implementing payment by results contracts.

A more detailed description of these barriers can be found below:

  • Limited technical supports and resources tailored specifically to the needs of the service provider community to build capacity, initiate, and implement PFS agreements;

  • A tendency by PFS intermediaries to engage in lengthy and costly feasibility studies and transaction structuring activities;

  • Insufficient consideration of appropriate evaluation standards and strategies given the existing evidence base, nonprofit capacity, and ability to maximize future learnings;

  • An overall undervaluing of the role of nonprofit-led performance management;

  • A lack of standardization of tools and templates to complete a) the PFS feasibility and structuring processes and b) impact measures to assess the performance of a deal.

Opportunity: The Social Impact Partnerships to Pay for Results Act (SIPPRA)

Accordingly, this is an opportune time to take a hard look at the state of Pay for Success and wider payment by results field. In fact, a key piece of legislation passed in the Bipartisan Budget Act of 2018, the Social Impact Partnerships to Pay for Results Act (SIPPRA), which has the potential to help expand and strengthen the application of Pay for Success financing structures.

SIPPRA is meant to improve upon the work of earlier Pay for Success deals, provide renewed energy and investment in the field, and correct against a previous obstacle to successfully scaling the model: monetizing measurable outcomes that result in social benefit and demonstrable cost savings to the federal government. SIPPRA represents the single largest singular installment of federal funds ever passed for Pay for Success ($100 million in first installment).

Key Information on SIPPRA

  • $100 million in funding, housed in the Treasury Department, to compensate state and local governments for savings/ economic value that accrue to the federal government;

  • Initial Request for Proposal expected to be released spring of 2019;

  • SIPPRA is meant to address a major issue to date in scaling PFS – the wrong pockets problem (where a substantial portion of a program’s savings accrue to a public entity—in this case, the federal government—which does not easily have the means to monetize or “pay back” that portion of financial savings);

  • SIPPRA can be used to support a wide range of outcomes including unemployment, child welfare, health, homelessness, education, and early childhood development;

  • Projects will be eligible if they demonstrate “rigorous evidence” that an intervention can be expected to produce the desired outcomes (yet to be defined what constitutes rigorous evidence);

  • Programs to be implemented with SIPPRA payment will require a RCT or high-quality quasi-experimental design if an RCT is not feasible;

  • 50% of SIPPRA funding must be used for initiatives that directly benefit children or young adults.

2nd Generation Pay for Success Advisory Services Model

In light of this new legislation and Project Evident’s work strengthening the resources and supports available to providers to build practical and operational evidence of impact, Project Evident is working to advance a more nimble, nonprofit-driven, outcomes-focused Pay for Success advisory services model. Project Evident believes that a more optimal Pay for Success structure is possible, one that is more adaptive and attentive to nonprofit operating realities and priorities in determining the project’s evaluation, performance management, and payment structures.

In reducing the cost, complexity, and time required to assess the viability of PFS project and contracting structures and assisting in specific high-value PFS structuring activities that leverage the talents and energies of the nonprofit sector to refine and adapt the Pay for Success model, Project Evident aims for Pay for Success to be an even more catalytic financing option for a wider array of impactful social service providers. The goal is to dramatically empower nonprofit organizations to build the supply of investable, outcomes-focused payment by results projects.

Project Evident is currently working to embed this structure in future Pay for Success transactions through project structuring activities, including:

  • Developing measurable, meaningful, and obtainable outcomes for the project;

  • Developing an appropriate evaluation design and project reporting structure given service providers’ and program participants’ needs;

  • Cost benefit modeling and outcomes pricing support;

  • Assisting in the design of participant referral streams and eligibility criteria;

  • Assisting in the development of a contracting and payment structure that is most amenable to continuous program learning and improvement;

  • Assisting in the development of a project governance structure that maximizes service provider voice and organizational operating realities;

  • Assisting in communications and external relations to emphasize the role of the service provider in deal construction and implementation.

[1] The specific count varies depending on whether certain innovative transactions that have recently launched are categorized as Pay for Success or, alternatively, a separate class of social impact financing model.