How Pay for Success May Work with Medicaid to Promote Public Health

New research provides insights into how the innovative “Pay for Success” (PFS) financing model could be used in interventions aimed at Medicaid populations. The analysis, one of the first investigations into the potential of PFS for Medicaid recipients, suggests that the approach could help fund the implementation of evidence-based childhood asthma interventions that help avoid emergency department visits—if legal and regulatory barriers can be overcome.

“Investing in health and human services programs that are preventive in nature is challenging for the public sector,” explains Paula M. Lantz, associate dean of academic affairs at the University of Michigan’s Gerald R. Ford School of Public Policy, who previously served as the chair of the George Washington University (GW) Milken Institute SPH’s Department of Health Policy and Management.  “Allocating scarce public resources for potential and diffuse future gains can be difficult given more acute, immediate needs. In addition, the payoffs from upstream investments in prevention, especially those aimed at children, are often realized in different fiscal years under different administrations and are spread across a number of departments or agencies.”

The up-front capital in PFS contracts, also known as social impact bonds, comes from investors such as philanthropic foundations or investment banks including Goldman Sachs. If an independent evaluation shows that the intervention achieved agreed-upon outcomes, such as a reduced number of emergency department visits, then the investment is repaid by the government (or other traditional funder). If the outcomes are not achieved, the investor takes the loss.

The research project, which Lantz began while she was at GW, capitalizes on what she says is “great interest in using PFS financing to scale multicomponent homed-based childhood asthma interventions in low-income populations,” including the Medicaid population. “Understanding the PFS potential of this intervention requires understanding of the costs and benefits to both state and federal Medicaid programs,” explains Sara Rosenbaum, GW’s Harold and Jane Hirsh Professor of Health Law and Policy.

To reveal both the potential and the policy-related challenges of using PFS to target children with asthma on Medicaid, the research team modeled the economics of a potential intervention using data from a population in Detroit including three groups of children with varying asthma severity under different assumptions and time frames.

The modeling results showed that a multicomponent home-based intervention targeting children on Medicaid with the most severe asthma has the potential to save costs because the savings from the predicted reduction in emergency department visits and hospitalizations are greater than the costs of delivering the intervention. However, as the new paper points out, the current Medicaid law and regulation generally do not permit the federal program to make payments to private investors, especially when the services involved are outside of “medical assistance” or what Medicaid is authorized to cover.

“‘Pay for Success’ Financing and Home-Based Multicomponent Childhood Asthma Interventions: Modeling Results From the Detroit Medicaid Population?” is published in Milbank Quarterly.  In addition to Lantz and Rosenbaum, authors include:  Leighton Ku, the director of the Milken Institute SPH’s Center for Health Policy Research; Samantha Iovan of the University of Michigan; and George Miller and Corwin N. Rhyan of the Altarum Institute.

The article identifies four general options for structuring a payout that could work in the current Medicaid legal/regulatory content. The recommendations include establishing centralized PFS funds at the state and federal levels, which the authors say would be critically important if PFS is to be successful in improving outcomes and reducing costs in the Medicaid population.