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Pay for prevention, not financiers and middlemen

Blog Post
June 2, 2015By Chuck Sheketoff

Preventing social problems before they arise is a smart thing to do. Certainly, taking steps that prevent child abuse and neglect is better for the kids, better for the state budget and better for all Oregonians.

While Oregon should certainly invest more in preventing the behaviors that lead to children being placed in foster care, lawmakers should reject a proposal that goes by the name of Pay for Prevention.

This proposed $5 million pilot program has a worthy goal: keep kids safe in their own families and save the state money that otherwise would be spent on foster care, health care, the criminal justice system and other public services. Its financing mechanism, however, is flawed, unnecessarily involving financiers and giving these investors a cut of the taxpayer savings the prevention program yields.

Pay for Prevention would use a financing scheme often referred to as “social impact bonds.” They aren’t technically bonds; the term is meant to describe the complex contractual relationship between the government, social service providers and outside investors. Sometimes the scheme is called “social impact financing” or “pay for success.”

Here’s how the scheme is supposed to work. Private investors provide the up-front dollars to local social service providers who provide interventions to prevent a social problem (in this case, targeting families with children most at risk of ending up in foster care). The theory is that the private investment dollars are needed because the state doesn’t have adequate financial resources to spend on preventive work. The investors’ funding, the theory goes, allows the state to avoid diverting resources from other human services programs in order to undertake the preventive work. If the prevention efforts are successful — fewer children enter foster care — then the state saves money and is able to pay back the investors their money plus a profit. The theory presumes that even after paying the investors and service providers, the state reaps financial savings.

The theory, however, looks better on paper than in reality. States and others evaluating pay for prevention programs have noted that even with successful outcomes, the program may not end up saving the state money. The reason is because the scheme involves paying not just the investors out of the savings, but also a multitude of other intermediaries, such as lawyers to set up the complex contractual relationships and consultants to evaluate success and calculate savings.

Such financing schemes tried elsewhere have yet to prove they work as envisioned.

And there is reason to question whether the proposed Oregon Pay for Prevention pilot program will work as advertised. Its proponents, the Center for Evidence-Based Policy at OHSU, received $800,000 from the 2014 legislature to establish the legal, financial and administrative foundations to launch the pilot program. OHSU promised the legislature that the $800,000 would leverage $4.5 million in outside investment, but the investors did not materialize. Now OHSU is asking for $5 million to be placed in a “reimbursement fund” at the OHSU Foundation, with the hope that those funds will leverage the $4.5 million in investor funds that the $800,000 of work failed to accomplish.

Asking the state to pony up $5 million up-front subverts the social impact financing model, which is supposed to spare the state having to take money out of the budget to finance the prevention effort. If Oregon has $5 million right now, why not invest it directly in prevention and reap all of the savings?

Also troubling is the fact OHSU has yet to present to lawmakers an economic plan showing in detail how a successful program would yield net savings to the state. OHSU’s promise that the $800,000 would produce such a plan has yet to materialize.

Oregon Center for Public Policy laid out concerns about the financing scheme for Pay for Prevention in a recent memo to legislators. OHSU responded in turn, a response that was without substance.

While OHSU argues we inaccurately characterized the scheme as a “bond,” these types of schemes are often called “social impact bonds,” a fact OHSU cannot deny. Indeed, the entity that is funneling federal dollars to OHSU to support the effort notes the use of the term “social impact bond” when referring to these types of financing schemes.

While OHSU claims we offered no alternative to the crisis of child abuse and neglect or the funding mechanism to address it, they ignored that we stated at the outset that we support prevention, including the very prevention intervention the program envisions. Further, our memo specifically outlines a number of alternative ways to finance prevention. Those include direct spending through prudent budget choices; sustaining those efforts during difficult economic times through a robust rainy day fund; and even conventional borrowing, which would mean lower risk and offer better rates than private investor financing.

The fact is that Oregon can invest in prevention and its rigorous evaluation without involving private sector financiers, so that all of the savings accrue to taxpayers. Oregon already has experience with this. Some may remember the “Oregon Option,” an agreement with the Clinton Administration where the federal government allowed Oregon to keep federal dollars Oregon “saved” by accomplishing certain goals in the welfare arena. Today we are investing millions in state and federal tax dollars in evidence-based preventive health care through Oregon’s large-scale health care transformation effort.

Oregon lawmakers should reject the effort to set aside $5 million in an OHSU escrow account and instead directly invest the money in programs for prevention of child abuse and neglect and their rigorous evaluation. Lawmakers should reject financiers and other unnecessary, costly intermediaries, and instead allow Oregon taxpayers to accrue all the financial savings from important, successful prevention efforts.


This post was originally published on www.blueoregon.com on June 2, 2015. The original post can be found at http://www.blueoregon.com/2015/06/pay-prevention-not-financiers-middlemen/.