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.

Arkansas is moving from “fee-for-service” payments, “in which each procedure a patient undergoes for a single medical condition is billed separately,” to a “bundled” approach, in which “the costs of all the hospitalizations, office visits, tests and treatments will be rolled into one ‘episode-based’ or ‘bundled’ payment” (NYT, Sept. 5, 2012).

Aligning payment systems with outcomes vs. medical procedures makes sense. But what’s in the ‘bundle’?

The evidence is clear that social determinants (the conditions and choices where we live, work, learn and play) account for more than half of what sends us into the medical care system in the first place. Payment systems need to incentivize primary prevention that improves the environment and behaviors essential to health.

Anything less and we’re still spending our money in the wrong place.

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

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.