An new evolution in Pay for Success could help improve outcomes for communities.

It’s been five years since the first Pay for Success transaction closed in the U.S. At Living Cities, we’ve been asking ourselves: “Five years later, what has Pay for Success (PFS) achieved and what does its future look like?” Our blog series will share reflections from us and our partners on new directions in PFS. Today we are featuring Social Finance. Follow our Pay for Success Newsletter for updates!

Social Finance has worked to develop and launch Pay for Success (PFS) projects since 2011, and during that time we’ve learned and evolved our work as we help to build the PFS field. One such evolution began several years ago when we became interested in the use of “outcomes rate cards.” The U.K. central government was using outcomes rate cards—an outcomes-based procurement method—to simultaneously launch many PFS projects. We believe that outcomes rate cards will play an important role in helping to scale PFS principles, and we have recently commenced technical assistance in Riverside County, CA and Connecticut via a national competition to develop the first outcomes rate cards in the U.S. We enter into this work excited about the potential of outcomes rate cards to improve outcomes for communities, but mindful of aspects of outcomes rate card development that will require thoughtful decision-making and collaboration across project stakeholders.

What is an outcomes rate card?

An outcomes rate card is a procurement and contracting tool through which government defines a menu of outcomes it seeks to “purchase” for a given issue area and target population, and the amount it is willing to pay each time a given outcome is achieved. For example, if a local government wanted to boost employment among at-risk young adults, it would define the value of relevant outcomes such as industry certification, job placement, job retention, and earnings increases, and use a rate card to procure and pay service providers based on those outcomes and set of associated rates. Thus, outcomes rate cards standardize outcomes-based financing: the tool enables governments to launch multiple PFS projects, using a rate card to procure multiple service providers and reach more people with performance-based services.

An example of an outcomes rate card. Credit: Social Finance An example of an outcomes rate card. Credit: Social Finance

This approach is rooted in core PFS principles, while offering governments flexibility in how to apply outcomes-based approaches. As in a PFS project, outcomes rate cards still encourage governments to prioritize programs based on evidence of effectiveness, specifically define the target population for a given initiative and understand the value of changing outcomes for that population, monitor and measure program performance, establish contracts that link performance and payment, and have the opportunity to transfer risk by engaging impact investors to cover upfront program costs.

However, outcomes rate cards do differ from the typical PFS development approach. In an outcomes rate card, the outcome payor defines outcomes and prices at the beginning of the process. By frontloading this work, governments can launch multiple projects at once, ultimately creating a pathway to launching PFS projects at scale—and reaching more people in need.

The outcomes rate card development process vs. the "traditional" PFS process. Credit: Social Finance The outcomes rate card development process vs. the “traditional” PFS process. Credit: Social Finance

The process of standardization does introduce new tradeoffs, however. Structuring an outcomes rate card raises challenges and questions about: (1) selecting and pricing outcomes, (2) covering provider costs, (3) measuring project performance, and (4) service provider working capital. Here’s our initial thinking on these different issues, which are sure to evolve as we continue our work:

Selecting and pricing outcomes

How do we select and determine the value of outcomes?

  • Similar to “traditional” PFS projects, Social Finance will rely on secondary evidence, local administrative program and cost data, provider programmatic data, and additional sources to perform economic analysis and identify and price meaningful engagement, short, and long-term outcomes for a given rate card; outcomes rate cards are designed to include a range of outcomes—from early programmatic milestones to long-term positive life improvements
  • Service providers choose which outcomes they expect to achieve based on their strengths, and contract with the government to fulfill those outcomes (i.e. service providers may not need to target all the outcomes on an outcomes rate card)

Covering provider costs

Are the outcome rates sufficient to cover the cost of provider services?

  • The outcome rate card development process will require a detailed service provider landscaping exercise—many human service agencies are chronically underfunded, and project partners will seek to understand the range of provider costs and services for the chosen issue area and target population
  • Outcome rates will take into account the value to government and the real cost of providing services
  • An outcomes rate card includes a “menu” of outcomes; service providers would cover program costs by achieving multiple outcomes on the menu
  • Not all providers have the same costs or services; rates will intend to attract multiple providers but may not be the right approach for some services providers

Measuring project performance

How do we measure success?

  • The measurement approach will be determined during the outcomes rate card development process according to the priorities of the project partners
  • UK rate card projects have not evaluated outcomes against a counterfactual, but instead track achievement against a goal; US projects will consider this approach among others
  • Government and service provider partners need IT systems in place to measure, track, and validate outcome achievement, ultimately connecting these outcomes to payment

Service provider working capital

How will providers find outside capital to fund service delivery costs?

  • Early outcome payments in outcomes rate card projects can be recycled into service delivery, creating ongoing funding for service providers
  • To launch services, some service providers will require working capital funding, others will be able to self-fund from their balance sheet—both approaches will be embraced as we explore solutions-oriented ways for governments to pay for outcomes
  • Because of our government technical assistance role in the initial rate card projects, Social Finance will not be an active participant in the capital raise

For a state or local government, developing an outcomes rate card involves asking important questions about the ultimate goal of different services, helping to clarify how to make funding decisions that incentivize providers to achieve that goal. In doing so, governments flexibly encourage activities that achieve high-priority outcomes with multiple interventions and strategies. If you are interested in learning more about outcomes rate cards, get in touch. Further, Social Finance anticipates a second round of the competition will open within the next year, and we look forward to advancing outcomes-based projects short and long term.