Health Impact Bond


Earlier this year,  Prevention Institute (PI) hosted a webinar entitled “How Can We Pay for a Healthy Population?” with four presenters describing promising approaches for generating sustainable and consistent funding for community prevention. In response to the many thought-provoking questions from participants, PI posted a follow-up Q&A on the topic…

PI: What is the potential in scaling up the approach you presented and/or replicating it elsewhere across the country?

Collective Health (CH): We think there is significant potential to scale up and replicate our asthma intervention, within Fresno and in other communities, using Health Impact Bonds or other forms of health-impact investing. At the end of phase one of our Fresno asthma project, we will have validated cost savings using insurance claims data. This will support scale up of the program through shared-savings contracts between payers (insurers, employers, and others that directly benefit from reduced health care costs) and investors (foundations, individuals, and institutions that provide upfront capital for the intervention). While our project focuses on asthma, we see many opportunities to expand the application of health-impact investing to other areas of prevention (e.g., comprehensive care coordination models to reduce avoidable emergency department visits, hospital re-admissions, at-risk maternity, serious mental illness, onsite/telehealth/in-home care).

PI: Do you think the four approaches (PDF download) — Accountable Care Community, Health Impact Bonds, Nonprofit Hospital Community Benefit Funding, Prevention and Wellness Trust — are potentially complementary? If so, how?

CH: Yes, it is worth exploring potential connections among these approaches. For example, could Community Benefit or Wellness Trust dollars be invested into Health Impact Bonds that support evidence-based prevention and generate better health and financial outcomes? In this case, it might be possible for these investments to earn a financial return that could then be re-invested in additional programs and expansion. Another example might be using Health Impact Bonds to finance the initial start-up costs for Accountable Care Communities.

PI: One of the challenges in promoting investment in community prevention is that in moving “upstream” the impacts of interventions become harder to capture (e.g., improving neighborhood air quality has multiple health benefits and cost savings potentially accrue to different health payers and other non-health sectors). How does the approach you discussed deal with this challenge?

CH: A fundamental and sustainable shift in health will only come about if we take on the big issues: the social, environmental and economic systems that influence our health, health behaviors and health choices. Changes at this level will require collective action — and generate collective benefits — across many stakeholders (i.e., all of us). It will require patient capital, long-term investment and a larger pool of investors to spread risk and return. In our white paper (PDF download) referenced in the PI report, we considered a Health Capital Market, where multiple Health Impact Bonds and other investment vehicles would connect a broader set of investors and public and private payers to finance community-wide health improvement and prevention efforts.

Social Finance, Inc. and Collective Health announced today that The California Endowment (TCE) has awarded them $660,000 in grant funding to launch a demonstration project to improve the health of low-income children with asthma and reduce the costs that result from emergency treatments. Based in Fresno, California, the project will incorporate rigorous data collection and evaluation methodologies in order to demonstrate the dual social and financial benefits of up-front investment in asthma management and prevention. This project will lay the groundwork for Social Finance and Collective Health to design and launch the first health-focused Social Impact Bond in the U.S. (Read full story here.)

Prevention Institute’s “How Can We Pay for a Healthy Population” webinar recording and slides are now available here. The webinar covered four strategies to secure sustainable funding for community prevention efforts:

  • Accountable Care Communities
  • Health Impact Bonds
  • Hospital Community Benefit funding
  • Wellness Trusts

Presenter Q&A is also available here.

A new report and upcoming webinar hosted by Prevention Institute presents strategies to shift health care financing from treating illness to keeping people well.

  • The report, How Can We Pay For a Healthier Population?, highlights wellness trusts, social impact bonds/health impact bonds, community benefit funds, and accountable care organizations/accountable care communities with the potential for replication and scaling.
  • The webinar on March 6 (2:00pm-3:30pm EST, 11:00am-12:30pm PST) will explain more about how these approaches can create healthier community conditions that improve health and financial outcomes at the population level.

“With a 20% countywide pediatric asthma rate, Fresno, California, is the first U.S. community to test a health care funding strategy that could both reduce treatment costs and provide a financial incentive to investors.” – coverage in Environmental Health Perspectives (web, PDF), published by the National Institute of Environmental Health Sciences (NIEHS).

Other recent coverage in ForbesThe Bond Buyer, Fast Company, and Nikkei (PDF in Japanese).

Recent coverage of Health Impact Bonds and Collective Health’s projects with Fresno and Whirlpool Corporation…

  • “An unusual experiment is underway in Fresno, Calif., that could usher in a new era in managing chronic illnesses and reducing related health care costs… Meanwhile, Collective Health is talking with other self-insured employers and health plans around the country about using the health impact bond model to benefit plan members and corral costs.” – City looks to fund asthma program through bond sales, Employee Benefit News
  • “The idea is to attract money from investors to pay for up-front treatments, in this case relatively small steps that can reduce indoor air pollution. Health providers save money with reduced costs, and they share those savings with the investors… This is the first time that a social impact bond has been focused on health care.” – Social Impact Bond May Fund Asthma Prevention in Fresno, KVPR – Valley Public Radio

Living Cities’ President & CEO Ben Hecht writes on Fast Company’s Co.EXIST site that there are “5 Transformational Forces That Should Be Driving The Social Sector (But Aren’t)”:

  1. Portable, Participatory and Personal Information
  2. Social Networks and Media
  3. Big Data
  4. Frugal Innovation
  5. Collaboration Is the New Competition

Another transformational force is the shift from traditional “funding” to “pay-for-success” financing. A good example is social impact bonds. And with Goldman Sachs’s recently announced $9.6 million investment to reduce prison recidivism in New York City, the door is opening wider.

In the health sector, Collective Health is using data to “hot spot” significant illness and costs linked to unhealthy social/community conditions. More than half of all health care spending is concentrated in just 5% of the population with the greatest health burden. So there’s a real opportunity to use data and Health Impact Bonds (PDF) to pay for community-based prevention that reduces/avoids future costs.

As Ben Hecht asks, what can happen when these transformational forces are “fully unleashed”? The social sector needs to sharpen its pencils, build a business case for smart investors, and discover what’s possible.

An op-ed in The New York Times presents an intriguing idea (“The College Graduate as Collateral,” Luigi Zingales, June 13, 2012):

Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)

We think there are applications in health care as well. Health insurers and employers have been receptive to our model for Health Impact Bonds (PDF): investors finance prevention and health promotion in exchange for a share of future value (improved health, lower health care costs). Demonstration projects focused on reducing asthma-related emergencies and other conditions are coming together in Fresno, CA, and other communities. (Related story on Fast Company‘s Co.EXIST site.)

While the current model is a form of debt financing, we are developing alternative financing mechanisms (and new insurance products) that could be a form of equity contract. In this sense, my/our future health can be collateral for investments made in disease prevention, evidence-based care, and environments that promote healthier choices and wellbeing. The incremental value generated by these investments would be realized — and shared — in the form of better health, higher productivity and achievement, and lower costs.

A report released by the Institute of Medicine last month recommends a new tax on medical care to generate more funding for public health initiatives to prevent disease (coverage). The proposal aims to address two disconnects in the current system:

  • First, the vast majority of our nation’s $2.6 trillion annual health spending focuses on downstream treatment of illness rather than on upstream prevention and health promotion achieved through public health (which accounts for just 3% of spending).
  • Second, health care financing structures and incentives are mis-aligned in a way that perpetuates this disconnect; it’s a vicious cycle.

But are taxes the best lever to re-align the system?

Instead, imagine a market-driven approach that leverages future health care cost savings to pay for proven health interventions today. For example, a “health impact bond” could generate upfront cash needed to pay for evidence-based chronic disease prevention programs; bond investors would receive a return based on a share of savings (costs avoided) that accrue to health insurers and other risk-bearing entities.

This model taps into a growing movement toward impact investing and pay-for-success contracting; it is based on carrots (incentives) not sticks (taxes); and it has the potential to capture ongoing savings streams for reinvestment, creating a virtuous cycle of health.

As a recent Fast Company article notes, the idea is gaining traction.

As a follow up to our earlier post on Health Impact Bonds℠, here’s an example focused on reducing asthma-related emergencies among children in Fresno, CA (see illustration: Asthma Value Model)…

Fresno County has an estimated 200,000 individuals living with asthma, who each year account for more than 6,000 emergency room visits and 1,100 hospitalizations, plus follow-up care and doctor office visits. When lost worker productivity is included, the annual cost of asthma in Fresno totals $87 million.

Yet despite the staggering impact of asthma-related emergencies, less than half of those with asthma have been taught how to avoid asthma triggers, and almost half of those who have been taught do not follow most of this advice. Many of these asthma triggers include indoor air quality issues (dust, mold, pest infestation and other allergens) that can be addressed by adding an environmental assessment and remediation in the home.

The linked diagram shows the four process steps for using a Health Impact Bond℠ to reduce asthma-related emergencies in Fresno:

  1. Identify: The cost of asthma among a target group of 1,100 children in Fresno includes $17.1 million in health care costs for emergency department services, hospitalizations and follow-up care. This assumes average cost of $15,567 per person, based on service utilization and unit cost data for the county. Additional costs related to missed school days, missed work days, and other medical and non-medical costs are not included in this total. Of the $17.1 million, Medi-Cal alone pays $8.1 million (47%) annually. However, an evidence-based intervention aimed at reducing home-based asthma triggers may save $6.3 million in reduced medical costs for these targeted service areas—$3 million of that savings for Medi-Cal alone.
  2. Invest: A $1.1 million investment ($1,000 per individual) required for this intervention will be raised through a Health Impact Bond℠. The bond investors—individuals and institutions among a growing market of impact investors—provide upfront capital based on an anticipated share of medical cost savings to be generated by the intervention. The bond term sheet specifies rate of return and timing—in this case, 5% return in 18 months.
  3. Improve: The $6.3 million savings projection noted above is based on evidence from a series of studies on home-based asthma interventions reviewed by the Centers for Disease Control and Prevention “Guide to Community Preventive Services”. In these studies, best practice interventions were able to significantly reduce annual medical costs for emergency room visits and hospitalizations within 18 months. The intervention is delivered by local service providers that are sourced based on efficacy and efficiency metrics, and are accountable to measurable results.
  4. Return: The financial benefits of these savings would accrue through reduced medical claims to Medi-Cal ($3 million) and local employers with self-funded insurance plans ($2.3 million), and also to local health care providers in capitated payment arrangements, accountable care organizations (ACOs), and similar incentive structures ($1 million). A portion of validated savings are used to repay principal and interest to the bondholders. Additional savings can be used as re-investment capital in expanding the approach to other populations and health conditions.

While we are using an asthma example here (and in our related paper on health impact investing), this approach can be used to finance any evidence-based intervention that reduces health care utilization/costs within a reasonable time frame (1-5 years).

What are the best interventions for diabetes, obesity, heart disease, and other chronic/acute illnesses? We’d like to hear your ideas! rick@collectivehealth.net

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