Health Impact Bond

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!

The US spends $2.6 trillion a year on a health care system that…

  • Fails to address primary sources of health and health risk; and
  • Misaligns incentives with the treatment of illness rather than prevention and health promotion.

An alternative strategy is presented in “Impact Investing in Sources of Health,” a paper commissioned by the California Endowment and co-authored by the University of California Berkeley and Collective Health. The authors, including noted social epidemiologist Dr. Len Syme, contend that “impact investment in upstream sources of health represents a substantial opportunity to improve downstream health outcomes and costs in a meaningful and sustainable way.”

The paper examines the growing movement toward impact investing, the launch of social impact bonds (also known as Pay for Success initiatives), and application of this strategy to address causes of asthma-related emergencies among children in Fresno, California. The approach generates investment capital in evidence-based interventions that reduce health care utilization and costs for financial stakeholders like public and private insurers, employers and health care providers; a share of the savings achieved is returned to impact investors to cover principal plus interest.

“Pay for Success initiatives are beginning to move forward in the US,” note the authors. “We believe this effort can be greatly expanded and accelerated with a market-based approach that engages private investor support.” Collective Health has created a number of innovative financing vehicles, such as the Health Impact Bond℠, to drive this market-based approach. Read the white paper here.

A study published in the New England Journal of Medicine “found that families who moved to lower-poverty neighborhoods had lower levels of obesity and diabetes than those who stayed behind. What’s more, the improvements in health were as significant as those that typically result from targeted diet and exercise interventions or the use of medications to treat diabetes,” reported TIME Healthland.

“Most of the families…were followed for an average of 12 years. (Those who moved) were 19% less likely to have a BMI of 40 or higher, the cutoff for morbid obesity, and 22% less likely to have glucose levels typical of diabetes, compared with those who stayed in public housing.”

The moves were made possible by a 1990 U.S. Department of Housing and Urban Development (HUD) program called Moving to Opportunity. The study does not provide cost-benefit analysis on the associated health improvements; however, as author Jens Ludwig of the University of Chicago notes, “The results suggest that over the long term, investments in improving neighborhood environments might be an important complement to medical care when it comes to preventing obesity and diabetes.”

Health Impact Bond is one way to support this investment.

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