Social Impact Bonds as a Funding Method for Health and Social Programs: Potential Areas of Concern

Abstract

Social Impact Bonds (SIBs) represent a new way to finance social service and health promotion programs whereby different types of investors provide an upfront investment of capital. If a given program meets predetermined criteria for a successful outcome, the government pays back investors with interest. Introduced in the United Kingdom in 2010, SIBs have since been implemented in the United States and across Europe, with some uptake in other jurisdictions.

We identify and explore selected areas of concern related to SIBs, drawing from literature examining market-based reforms to health and social services and the evolution of the SIB funding mechanism. These areas of concern include increased costs to governments, restricted program scope, fragmented policymaking, undermining of public-sector service provision, mischaracterization of the root causes of social problems, and entrenchment of systemically produced vulnerabilities.

We argue that it is essential to consider the long-term, aggregate, and contextualized effects of SIBs in order to evaluate their potential to contribute to public health. We conclude that such evaluations must explore the assumptions underlying the “common sense” arguments often used in support of SIBs.

Recent decades have seen the application of market-based reforms to the funding, conceptualization, and delivery of services related to public health.^1,2 Manifestations of this trend include the privatization of certain state services, often in combination with austerity measures through which governments limit spending on health and its determinants such as housing and income supports. In addition, public–private partnerships have become features of the public health landscape, confusing lines between state and private enterprise with respect to responsibility for health.³ More generally, market-oriented metrics have permeated health and social services so that even publicly provided programs are shaped by quantitative and cost-efficiency measures formerly reserved for enterprises such as retail sales.⁴ Finally, market-based logic emphasizes the responsibility of individuals for health, with people conceptualized as entrepreneurs with the capacity to maximize “human capital” through health-related behaviors.^1,5

Proponents of market-based reforms argue that reducing the role of the state in providing services maximizes efficiency and promotes innovation through the market’s competitive incentive structures. Critics describe negative implications such as policy and service fragmentation and increasingly limited access to both health care and social determinants of health.^1,2 In addition, the privatization of state functions has been demonstrated in many cases to yield higher costs for governments and service users.⁶ The use of market-friendly accountability metrics to determine the success of services has also been shown to limit time spent with clients, undermine values such as “caring,” and leave little space for the voices of people using programs.⁴ Finally, the focus on individual behaviors as preeminent causes of health outcomes runs contrary to scholarship on the structural factors that generate preventable ill health.^7–9

While the workings of market-based reforms are made visible through developments such as funding cuts and a focus on quantitative metrics, their function can be harder to unearth. Some literature focuses on the ways in which market-based reforms help government and private-sector interests work together to generate wealth for private markets through mechanisms such as tax credits, privatization, and speculation.^10–12 Other literature emphasizes links between market-based reforms and the ongoing racialized dimensions of capitalism, examining the evolving ways in which governments and private-sector actors work together to reproduce racialized vulnerability and render this vulnerability profitable to private markets.^5,13 In all of these cases, researchers explore ways in which market-based reforms reinforce existing power relations.

Reflecting trends in market-based reforms to health and social services, Social Impact Bonds (SIBs) are a financial instrument introduced in the United Kingdom in 2010 in the context of prison recidivism programs. SIBs allow investors such as individuals, banks, foundations, and nonprofit organizations to invest in time-limited social service and health-related programs. Targeted outcomes are specific and in some cases singular (e.g., reductions in prison recidivism rates), and they are tied to potential public savings (e.g., reductions in prison costs). If criteria for successful outcomes are met, investors are compensated by governments with a return of their initial investment and interest. If outcomes are not met, in theory investors lose their investment, although in practice some SIBs involve at least partial guarantees against loss of principal.¹⁴

A review by Social Finance, a nonprofit organization founded in the United Kingdom and responsible for the first SIB, identified 60 SIBs as of June 2016, with 31 in the United Kingdom, 10 in the United States, 5 in the Netherlands, 2 in Australia, 2 in Israel, and 1 each in Austria, Belgium, Canada, Finland, Germany, India, Peru, Portugal, Sweden, and Switzerland.¹⁵ In addition to prison recidivism programs, SIB funding has focused on interventions related to issues such as homelessness, unemployment, keeping families together and reducing apprehensions by child welfare systems, adoption placements, preschool programs, managing chronic health conditions, and supporting mothers with pregnancy and infant health.^15,16

SIBs are gaining traction in a range of jurisdictions. Legislation enabling SIB development has been passed at national and regional levels in the United Kingdom and the United States, and supportive policy frameworks have been established in Australia and Canada.¹⁶ In addition, foundations, investment banks, consultancies, nonprofits, and purpose-built research labs are leading an enthusiastic dialogue about SIBs, influencing public conversations, and drawing the interest of policymakers.^17–19

As SIBs are a recent development, there is no empirical evidence related to their long-term effects on health care and public health policy or social policy more generally. Experience with other market-based experiments in the public sector, however, suggests a need for caution and critical analysis. Although there is limited health-focused scholarship on SIBs, strong criticisms have emerged outside the health sector, some of which map to varying degrees onto general critiques of market-based reforms. Potential concerns include

1. increased costs to governments,

2. restricted program scope,

3. fragmented policymaking,

4. undermining of public-sector service provision,

5. mischaracterization of the root causes of social problems, and

6. entrenchment of systemically produced vulnerabilities.

We first describe the benefits of SIBs as proposed by supporters of the model. We then explore the possible adverse effects of SIBs just outlined. It is important to note that we are not examining concerns related to programs funded by SIBs; rather, we raise questions related to SIBs as a funding mechanism.

PROPOSED BENEFITS OF SOCIAL IMPACT BONDS

Proponents argue that SIBs have the capacity to fund innovative health and social programs while generating profits for investors and savings for governments. In the SIB literature, the public sector is described as lacking the resources and flexibility to address what are characterized as intractable social problems.¹⁹ It is suggested that, by partnering with the private sector, governments can access new sources of capital to fund programs with the capacity to both address these social problems and reduce the need for public investment in areas such as prisons and hospitals.^17,19–21 According to the model, this results in public-sector savings, some of which can be returned to investors.¹⁸ When programs do not meet targeted outcomes, the model seems to call for them to be discontinued, with investors losing their investment. In this way, SIBs are characterized as win–win options for governments, enabling them to experiment with the introduction or scale-up of programs without risking financial loss.¹⁹

SIBs are also said to improve program delivery by promoting the use of evidence, increasing accountability, facilitating flexibility, and encouraging collaboration. For example, one SIB proposal emphasized the model’s ability to extend “promising approaches that are backed by some evidence.”¹⁸ In addition, some argue that SIBs increase accountability, as SIB-funded programs are evaluated according to prespecified metrics and investor payouts are tied to outcomes.²² At the same time, SIBs are said to encourage flexibility: rather than follow prescribed actions, providers can do whatever is required to achieve outcomes. Finally, SIBs are said to encourage collaboration across government agencies,¹⁹ across siloes within nonprofits, and among governments, nonprofits, and the private sector.

CONCERNS RELATED TO SOCIAL IMPACT BONDS

Proponents offer a variety of arguments in favor of SIBs. At the same time, strong criticisms have emerged from a range of disciplines and sectors. In this section, we identify and explore selected areas of concern related to SIBs, drawing from literature examining market-based reforms to health and social services and the evolution of the SIB funding mechanism.

Increased Costs to Governments

As with earlier privatization schemes associated with market-based reforms,⁶ the potential for SIBs to increase costs to governments has been well highlighted.^5,23,24 Programs funded by SIBs are generally previously tested^5,14,16 and likely to achieve metrics set by SIB agreements. For example, in Canada, there has been a proposal to fund a version of the Housing First supportive housing program through an SIB.¹⁸ The proposal incorporates data from a publicly funded randomized controlled trial that demonstrated the effectiveness of the model and led to publicly funded iterations of the program.²⁵ In the United States, an early childhood education SIB based on a well-established program was recently proposed for Chicago, Illinois.²⁴ More broadly, a 2015 analysis by the Brookings Institution showed that, of the 38 SIBs active at that time, there was not “a single intervention that [had] never been used before this SIB transaction.”^16(p43)

The tendency to attach SIBs to existing programs that have a likelihood of delivering on expectations has led to a predictable outcome. A review by Social Finance indicates that most if not all current SIBs are on track to deliver returns to investors, and a report commissioned by the Organisation for Economic Co-operation and Development states that only 1 SIB to date—the Adolescent Behavioral Learning Experience (ABLE) recidivism program at the Rikers Island jail in New York State—has generated a loss for investors.^15,26 Because governments can generally borrow at lower interest rates than those available on the private market,²⁶ it is possible that governments will be paying, in aggregate, a long-term surcharge to private investors for health and social programs. More generally, according to the Organisation for Economic Co-operation and Development report, governments spend less when raising revenue through taxation and bonds than when borrowing from private markets.²⁶

In addition to investor payouts, SIBs generate costs unrelated to service delivery. These costs include third-party organizations that serve as intermediaries between governments, investors, and service delivery organizations, as well as non–service delivery staff such as program evaluators.^5,12,16,27 In addition, SIBs require substantial investment in systems and policies to facilitate their development.²⁸ Although a small number of SIBs seem to involve relatively modest returns and transaction costs, they appear to be exceptions.²⁹

Proponents argue that program and transaction costs, along with interest, are covered through savings generated to public services. For example, if someone finds work through an employment service, this could be considered a savings to the welfare system. In reality, however, outcomes met during the SIB period can be reversed shortly after.³⁰ More generally, researchers draw attention to the difficulty of establishing causal relationships between SIB-funded programs and long-term savings to public systems.^10,30,31

As most SIBs seem to be paying out to investors, governments will be left covering program and transaction costs, along with investor interest. Taken together, SIBs do not seem to introduce additional resources into public systems. Instead, they seem to introduce new costs, ones covered out of government budgets.

Restricted Program Scope

A second area of concern highlighted by researchers relates to program scope. As with the outcomes-based contracts introduced during earlier phases of market-based reforms, SIBs tie success to a limited number of metrics. For example, SIB-funded early childhood education programs are judged on a small number of measures, such as their ability to reduce the use of special education in later grades.³² Because of the restricted focus of SIBs, researchers note that important program components and outcomes could be marginalized,^12,33 along with participants considered unlikely to meet program goals.³¹ In addition, it is possible that the experience of participants could be excluded from SIB appraisals³³; a program that delivered targeted outcomes while generating negative experiences would still pay out to investors. Researchers also point out that the accounting-like measures used to keep track of people can efface the humanity of individuals and groups,³⁴ affecting policymaking and relationships between providers and clients and, therefore, service provision.

A recent evaluation demonstrates the potential for SIBs to restrict program scope over time. An assessment of a homelessness SIB in the United Kingdom indicates that the program was generally delivering responsive services, even in cases in which participants were not likely to achieve outcomes. Evaluators attribute this situation to the “ethos and history of the organization, and commitment and values of delivery staff.”^{35(p30; as cited in 36, p668)} Researchers caution that the buffering effect of the values embodied in some nonprofit organizations, however, could be reduced over time if these values lead to “adverse financial implications,” and programs and organizations are judged as successes or failures on the basis of narrowly defined outcomes and investor payouts. ^36(p668),37 Finally, the delivery of SIB-funded programs by private companies, a development suggested in the literature,²⁶ could also eliminate this buffer.

Although concerns related to program scope are largely speculative owing to the emerging nature of SIBs, ABLE provides an example of what can happen when SIB evaluations focus on a singular outcome. ABLE was judged a failure on the basis of 1 measure: the ability to reduce recidivism rates among young people incarcerated at Rikers Island jail by at least 10%.³⁸ The program did not meet this target and was discontinued. Although at least 1 report suggests that ABLE was having some positive effects,²³ no measures beyond participation and recidivism were included in the impact evaluation.³⁸ As a result, the ABLE program at Rikers Island was discontinued rather than, to our knowledge, refined, improved, or further explored.

Evidence also suggests issues related to the restricted time horizons built into SIB-funded programs. Although people may achieve specified outcomes in the time horizon of the SIB, circumstances evolve, and support may be needed over the long term. As a result, people can feel “abandoned” when programs end and can be made to feel negatively about themselves, especially if outcomes are reversed.³⁰ This is of particular concern if SIBs are posited over time as alternatives to more continuous forms of service delivery.

Fragmented Policymaking

In addition to their impact on program scope, SIBs are criticized for their potential contribution to fragmentation in policymaking. Market-based reforms are often driven by priorities such as cost cutting and a push to reduce government budgets and services.^1,2 They also embed competitive processes that discourage cooperation between stakeholders.² As policymakers, researchers, and service providers become further organized around market-based priorities, processes, and metrics, policymaking can lose coherence, particularly when policy goals—for example, access to quality affordable housing—conflict with the interests and logic of the private sector.

SIBs add yet another layer of complexity to policymaking, potentially pulling the focus from social aims as policymakers organize in response to their restrictive structure. The SIB funding model can be applied only to time-limited programs with quantifiable outcomes that can be linked to cost savings in the public sector. In addition, a government must agree to be the end payer, and investors must agree to invest. As a result, widespread use of SIBs could limit policy horizons, generating programs in a “piecemeal” fashion in response to “the requirements of the funding mechanism.”^{10(p77),39(p49)}

On the government side of this equation, jurisdictions have demonstrated that the requirements of the funding mechanism can play a key role in establishing which programs will go forward. For example, the government of the province of Ontario is going through a multiyear process to select its first SIB. The government began with a call for proposals based around themes of homelessness, “youth-at-risk,” and employment. It received 83 proposals, 4 of which proceeded to “business case development.” The field was eventually narrowed to 2 programs to be vetted by private consultants in terms of their suitability for SIB funding.²⁸

On the investor side of the equation, SIBs represent a move toward the privatization of policymaking. As “investor appetite” is a component of SIB feasibility assessments,⁴⁰ SIB-funded programs do not get off the ground unless private investors are willing to invest. Evidence also demonstrates that there can be cases in which private investors exert influence over programs themselves, assuming, “a prominent role in assessing and managing the operational performance of [an] SIB.”³⁰ Should SIBs become a widespread mode of service delivery, this could give private investors increased control over the scope and configuration of social safety nets.^5,39 Such a selection process could also contribute to the development of an ad hoc aggregation of programs most likely to deliver a profit.

Undermining Public Services

The impacts of SIBs extend to the way they frame the problems they are designed to address. Market-based discourse supportive of SIBs embeds narratives that bolster austerity measures and, with them, the erosion of public services. For example, many argue that SIBs are necessary because governments lack resources for what are framed as preventive responses to social problems.¹⁹ By positing austerity as a permanent condition, the pro-SIB discourse adds weight to economic and social policy trends producing systematic harm to health through erosion of access to services such as health care, mental health and addiction treatment, and housing.^1,5 Through its relentless repetition, this framing limits the realm of the possible in policymaking, foreclosing explorations of redistributive measures such as progressive taxation and equitable social safety nets.¹

The pro-SIB discourse appears to envision a world in which ongoing, government-funded services are scaled back in favor of time-limited, government-funded interventions that pay out profits to private investors. For example, early childhood education SIBs are meant to reduce special education costs. The SIB model calls for these savings, at least in part, to be diverted to private investors while eliminating now-unnecessary capacity in special education. This cycle seems to imagine that the baseline population will remain static, with the need for special education reduced in direct proportion to the success of early childhood education. It also seems to posit a steady decline in funding for special education. As with many SIBs, ongoing programming that is government funded is marked for attrition, whereas time-limited programming that is both government funded and open to speculation is targeted for scale-up.

Mischaracterization of the Root Causes

In keeping with discourses promoting market-based reforms,¹ SIBs posit the individual as the site at which to effect social change. Positioned as preventive solutions to “society’s toughest problems,”¹⁹ SIBs are generally used to fund time-limited programs designed to adjust individual behaviors or trajectories. As researchers point out, however, behavioral interventions cannot address structural causes.^5,39 For example, the recidivism SIB at Rikers Island involved a step-wise program called “Moral Reconation Therapy,” a combination of individual and group therapy.³⁸ A spokesperson for the Osbourne Association, which ran the Rikers Island SIB, commented on the program’s failure to reduce recidivism in the short term:

We are disappointed, but not surprised, by the outcome of the Vera Institute evaluation. The 3,000 kids we served through this program need comprehensive services and support. Most would not have been in adult jails in 48 states, and many would not have been jailed if they could have afforded bail.⁴¹

This statement identifies factors that are the responsibility of policymakers and lawmakers and that cannot be addressed by changing the behavior of individuals. In addition to these issues, incarceration rates in the United States can be tied to interrelated and long-identified factors that include structural racism, “three strikes” laws, for-profit prisons, prison labor, for-profit probation services, and the criminalization of drug use.^5,42,43 Proposing recidivism programs as “upstream” solutions to mass incarceration obscures these and other factors that are the responsibility of policymakers, lawmakers, investors, corporations, and polities, not individuals targeted by SIBs.

The same critique could be made about many SIB-funded programs. Asthma programs proposed as SIBs, for example, train parents to identify and address asthma triggers in the home and include visits with community health workers.¹⁷ Although important in the current context, these programs do not address the sources of pollution that ensure high asthma rates among children living in specific areas.^44,45 In addition, they do not address the structural factors that compel people to live in substandard housing or in neighborhoods with high levels of pollution.

As has long been clear within the discipline of public health, it is power relations that produce preventable ill health, not biology or individual behavior.⁹ Literature supportive of SIBs, however, concentrates hope and investment on behavior-focused interventions with the potential to deliver profits to investors. This focus serves to obscure the distal factors systematically producing sickness and mortality.^5,39

Entrenching Structural Issues

SIBs represent a novel way to extract wealth from programs that are a response to the vulnerability or “riskiness” produced by interrelated structural factors such as racism and austerity.^5,46 Put differently, SIBs leave these structural factors in place while rendering the vulnerabilities they produce profitable to private investors. In this way SIBs, which are typically aimed at “highly racialized issues such as prison recidivism, teen pregnancy and homelessness,”^5(p633) have the potential to further entrench systemically produced, racialized vulnerabilities by increasing their profitability.

This dynamic, although evolving, is not new. For example, modern banking and finance were shaped by their role in managing the wealth produced through colonialism and slavery.^5,13,47 As pointed out by Kish and Leroy, literature exploring developments such as SIBs often fails to ground these explorations “within the longer genealogy of racial capitalism.”^5(p634) From our review of the SIB literature, with the exception of Kish and Leroy’s investigation, even critical studies do not typically explore the dynamics of colonialism and White supremacy as they are built into and potentially advanced by the workings of the financial sector. Our own work here is largely based on a theoretical framework that allows us to map the development of SIBs against the marketization of the public sector as if both of these—marketization and the public sector—operated in a vacuum outside the context of present-tense colonialism and White supremacy.

In order to accurately apprehend the phenomenon of SIBs, future scholarship should ensure that both preventable ill health and market-based funding instruments are examined in historical, political, and economic context.

SUMMARY AND CONCLUSIONS

Narratives supportive of SIBs gain traction from the fact that, in jurisdictions such as Canada, public services urgently require transformation. In Ontario, where we live and work, policy interventions such as affordable housing and income support are underfunded by design.⁴⁸ In addition, evidence is clear that public institutions embed and reproduce the structural factors such as racism that produce and exacerbate preventable ill health.^7,49,50

SIBs, however, do not necessarily represent a way to repair the institutions and systems reliably contributing to health inequities. In places such as the United States where regressive taxation and cuts to public services seem inevitable in the short term, SIBs may present opportunities to introduce programs neglected as a result of austerity measures. More broadly, it is possible that because of the enthusiasm evoked by SIBs (termed “SIB fever” by one group of researchers⁴⁵), important programs that might have otherwise languished will move forward, at least in the short term. The risk remains, however, that SIBs will become normalized as “upstream” solutions rather than as stop-gap measures, focusing attention away from systemic issues or even statewide provision of particular programs. In jurisdictions where public expectations and political realities lean toward some degree of collective provision of goods such as health care, SIBs risk accomplishing “privatization by stealth,”⁵¹ harnessing progressive narratives related to upstream solutions to open public programs to profit.

Those involved in promoting SIBs identify real problems such as homelessness and mass incarceration. To remedy these problems, they propose to introduce private investors into the realm of public health. To assess a solution to a problem, it is essential to understand what is being proposed and why. Literature supportive of SIBs claims that behavior-focused interventions are “upstream” solutions that address “root causes.” Literature characterizing SIBs as “win–win” posits austerity as an inevitable condition and embraces markets as the best way to organize at least some health and social services. For the most part, these claims are treated as “common sense” and are not accompanied by supporting evidence. In the future, SIB and social policy researchers should outline the assumptions they are relying on to make their case and provide evidence to support these assumptions.

In conclusion, SIBs present a range of concerns for programs, policies, and social relations. Although individual SIB-funded programs may deliver expected outcomes, the funding mechanism itself has the potential to increase costs to governments, limit program scope, fragment policymaking, and undermine public services while contributing to the mischaracterization of the roots of social problems and entrenching systemically produced vulnerabilities. Literature supportive of SIBs often focuses on the promise of specific programs, but it is essential to consider the long-term, aggregate, and contextualized effects of SIBs as a funding mechanism when evaluating their potential to contribute to public health.