California City Seeks to Cut Asthma Rate via ‘Social Impact’ Bond Issue

By Manuela Badawy | October 19, 2012

The city of Fresno, Calif., will be the first municipality in the United States to see whether “social impact bonds,” an innovative security that promotes a societal benefit, can be used to tackle a major healthcare problem like asthma.

Fresno is using this new pay-for-success model, which will reward investors providing the financing for the program, if incidents of chronic asthma are reduced in this community where 20 percent of the city’s population suffers from the ailment, compared to 8 percent nationally, according to a California Health Interview Survey.

In this test case, the financing is being provided by the California Endowment, a not-for-profit that is not looking to make money on the arrangement. But if Fresno can produce positive results in reducing asthma rates, it might encourage private investors to provide financing for other social impact bonds that deal with health-related issues.

As the U.S. healthcare system stretches thin, nonprofits are designing new methods to attend their communities’ medical needs while making these programs financially enticing to the for-profit and private sector.

There’s a need for innovative solutions because the U.S. spends more than 15 percent of its gross domestic product, or $2.7 trillion a year, in health care cost, and primarily in addressing the treatment, hospitalization and medical care.

The risk, however, is on the nonprofits to prove that savings can be achieved through this model, as well as the effectiveness, quality of the intervention design and evaluation methods.

This health impact bond pilot program is the first in North America. These are not real fixed-income bonds but more like pay-for-success contracts designed to measure social outcomes.

New York City, backed by Goldman Sachs, and the state of Massachusetts were first in the United States to launch social impact bonds measuring recidivism earlier this summer.

With this new pilot, however, the impact bond is moving into the healthcare arena.

The test-run aims to show that with an investment in preventive health, not only will patients’ quality of life improve, there will be fewer visits to the doctors or hospitals and employers will be able to lower their claims costs, potentially realizing significant savings for investors.

The California endowment is investing “hundreds of thousands” in this pilot and will not get any money back from the savings created, instead, all the savings will be accrued by the insurers, just to show that the project works.

This health contract is expected to demonstrate that by educating patients and taking action against asthma triggers at home, insurers and employers can achieve 30 percent to 40 percent in savings per person per year on emergency visits and other costs.

Collective Health, a nonprofit organization has joined with Fresno’s Clinica Sierra Vista, a nonprofit corporation, to work with 1,100 asthma low-income patients throughout a one-year period to demonstrate that by making slight changes in their homes and behaviors, individual asthma sufferers can exponentially improve their health and save insurers more than $5,000 in healthcare expenses each year.

Repayment to investors is contingent upon specified social outcomes being achieved and therefore in terms of investment risk Social Impact Bonds are more similar to that of a structured product or an equity investment.

Important criteria to consider whether a SIB or SIB-like model is suitable for financing are, among others: evidence of efficacy and savings, scale, measurable impact, and causality, according to Erica Barbosa, program officer at the J.W. McConnell Family Foundation in Montreal, Canada.

“Until the integrated intervention has been validated on all those criteria, I would argue that they are at a too-early a stage to know if the health impact bond will be a good financing model for this intervention; there might be other more suitable financing models,” Barbosa added.

The health impact bond comes at a time when health insurers are 15 months away from the trigger date for the implementation of profit limitation of the Affordable Care Act, also known as Obamacare, which will limit the profits an insurer can share with its shareholders.

This will push insurers to find other ways to invest the extra money, and a do-good solution would be to invest it back into a bond that could provide them with a 3.6 percent return once other similar projects are completed.

“The money will be used to reduce the expense associated with the care of their patients and in turn make more money,” said Kevin Hamilton, deputy chief of programs at Clinica Sierra Vista Inc, in Fresno, California. “Not only that, they will likely get to write this money off because it is going to a bond with social impact while still making money for their shareholders.”

For this pioneer health impact bond, one large obstacle is to bring insurers on board. Even if the insurers will be accruing all the savings they would like to see it succeed first.

“The biggest hurdle is that we need to prove that there are real savings to be made,” said Rick Brush, founder and chief executive of Collective Health.

For employers such as Whirlpool, a multinational manufacturer and marketer of major home appliances, health impact bonds could provide “all the gain and none of the risk,” said Susan Pavlopoulos, Senior Manager of Global Benefits for Whirlpool Corp. based in Michigan.

Whirlpool is eyeing an asthma prevention health impact bond for its employees either in Michigan or in Ohio.

Setting the goals and metrics at the start of the project will determine its success with little to no risk to the company’s employees or health plan members, Pavlopoulos argued.

Asthma, as any other chronic disease, causes many emergency room visits, hospitalizations and about $15,000 in expenses each year for an individual.

But with this new prevention program based on data provided by insurance companies such as Anthem Blue Cross and Health Net, Collective Health is hoping to bring that number down to $9,870.

As this innovative healthcare investment vehicle is set to launch its pilot, the nonprofits and the California Endowment are betting on increased savings so to attract profit-oriented investors, such as banks or hedge funds, for the next health prevention bond.

“Capital is agnostic; if you promise them a return, particularly now when there aren’t a lot of great investment opportunities, they will come in,” said Anthony Iton, Senior Vice President at The California Endowment.

Topics USA Carriers California NonProfits

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