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The Application of Social Impact Bonds to Universal Healthcare Initiatives in Southeast Asia

Written by Instiglio

For the World Health Organization’s Regional Office for South-East Asia

Draft as of July 2, 2013

Corresponding Author

Mr. Michael BelinskyFounding PartnerInstiglio, Inc. Cambridge, MA, [email protected]

Preliminary and for discussion only Do not cite

TABLE OF CONTENTS

I. Introduction............................................................................................................................2

II. What is a Social Impact Bond?..........................................................................................3

III. What is the Value of a Social Impact Bond?....................................................................4

IV. Using Social Impact Bonds to Advance Universal Healthcare in Southeast Asia........6

VI. Challenges of creating a SIB............................................................................................13

VII. An Illustration of a Potential SIBs Applicable to Southeast Asia................................15

ABSTRACT

Social impact bonds (SIBs) have the potential to improve the efficiency of healthcare spending in southeast Asia. In a SIB, governments sign a pay-for-performance contract with one or several providers of healthcare services and the providers borrow up-front capital from investors. Governments outside southeast Asia have started to experiment with SIBs in criminal justice, homelessness and healthcare. Southeast Asian governments can advance the goal of universal healthcare by using SIBs to improve the efficiency of healthcare service providers and by motivating providers to expand coverage. This paper describes SIBs and their potential application to healthcare initiatives in the region.

ACKNOWLEDGEMENTS

Professor Grant Miller and Professor David Bloom commented on the draft. Michael Eddy, Michael George and Johannes Lohmann provided comments and research assistance.

ABOUT INSTIGLIO

Instiglio is a nonprofit organization founded in 2012 with the goal of advancing social impact bonds and results-based financing programs in international development. Instiglio has received several awards for its work, including the Echoing Green Fellowship, the Rainer Arnhold Fellowship from the Mulago Foundation, and a finalist selection at the Harvard Business School business plan competition. Instiglio’s work has been featured in the Economist, the Guardian, and the Boston Globe, among others. Instiglio has recently won a Development Innovation Ventures grant from the U.S. Agency for International Development to design social impact bonds in Colombia. Instiglio’s projects include the design of a SIB in India around girls’ education, exploratory work in Ghana on workforce development and exploratory work in Colombia on the reduction of teen pregnancy.

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I. Introduction

Social impact bonds have gained attention worldwide for their promise to increase funding for social programs, improve social outcomes and create enduring partnerships among participants from private, social and public sectors. Yet the application of social impact bonds to healthcare in development remains largely unexplored. This paper describes SIBs and their potential application to healthcare initiatives in Southeast Asia, with a focus on their contribution to universal healthcare.

II. What is a Social Impact Bond?

A Social Impact Bond, or a SIB, is an innovation in the way social services are contracted, financed and delivered that has the potential to dramatically improve societal outcomes through the involvement of private capital. Unlike traditional government contracts, where governments must provide up-front funding, in a SIB, private investors provide the needed capital. A SIB contract contemplates the government would repay these investors, with a return on their investment, only if those providers successfully achieve an agreed upon outcome. For example, instead of paying an organization providing healthcare services based on how many individuals go through its program, the contract would pay only if there were a resulting improvement in health. This innovative approach ensures that government funds are spent only on social programs that succeed. While investors in SIBs may receive an investment return from the government, they also take on the financial risk, as they stand to lose a portion of their investment if social outcomes do not improve. An independent evaluator validates the result with a rigorous analysis, such as a randomized controlled trial.

SIBs are receiving increasing attention worldwide as a novel tool with the ability to reform and improve social services. The first SIB was created in the United Kingdom in 2010. Since then at least two dozen local, state and national governments have started designing social impact bonds in Australia, Canada, Israel, the United States, the U.K., and elsewhere.1 In the U.K. and the U.S., where SIBs have received the most attention, governments have started designing supporting institutions for SIBs. President Barack Obama has proposed allotting nearly $500 million of the Fiscal Year 2014 Budget for the U.S. government to facilitate the creation of pay-for-success contracts.2 The U.K. Cabinet Office has created the Centre for Social Impact Bonds to educate and assist SIB designers.3

SIBs hold promise for creating alignment among government agencies, private investors and nonprofit organizations to improve the outcomes of overburdened and resource-constrained governmental social service programs. The SIB accomplishes this by (i) establishing clear rewards to investors for providing risk capital, (ii) providing unambiguous metrics that align each stakeholder to the same outcome and (iii) establishing a contractual framework that

1 “Lessons Learned So Far,” Community Development Investment Review, The Federal Reserve Bank of San Francisco, Volume 9, Issue 1, 2013. 2 Steven VanRoekel and Jonathan Greenblatt, “Pay for Success: An Innovative Approach to Improve Results and Save Money,” Office of Management and Budget, The White House, July 10, 2013. 3 http://blogs.cabinetoffice.gov.uk/socialimpactbonds/about-sib/ .

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allocates shared responsibilities and clear expectations among the parties involved. Successful SIBs are designed to provide valuable benefits for all participants, including creating sustainable multi-year funding for effective non-profit service organizations; delivering increased and improved social services to disadvantaged individuals and communities; building accountability into government sponsored programs and improving outcomes for overburdened government social service agencies; and generating social, and potentially financial, returns for investors.

The roles of the different parties cooperating in a SIB program are described below.

A SIB program is usually created with the assistance of an intermediary organization. This organization’s role is to (i) establish a relationship between the government, the service provider or set of providers, the investors, and the independent evaluators; (ii) bid on and receive pay-for-success contracts issued by the government; (iii) identify investors, government officials, and service providers and educate them about the pay-for-success contract program; (iv) evaluate service providers for their services’ applicability to the pay-for-success contract program; and (v) negotiate and establish relationships with service providers for the purpose of applying to pay-for-success contracts issued by the government.

A service provider is an organization that operates a social service program through a pay-for-success contract. The service provider receives up-front financing from investors through an intermediary like Instiglio to operate the program for a predetermined duration. The service provider works with Instiglio and the government to create and deliver reports on program outcomes. Service providers may be nonprofit or for-profit organizations, although most previous service providers that have operated through pay-for-success contracts have been nonprofit organizations. The service provider may be a set of different nonprofit organizations that collectively provide a set of services through a pay-for-success contact.

An evaluator is an organization that is competent in conducting evaluations of social programs and is independent in its interests and affiliations from the government, the service providers, and Instiglio. The government is one or several government agencies that are involved in the identification of the right intervention, the design and negotiation of the pay-for-success contract around that intervention, and responsible for disbursing the payment to Instiglio in the event that its services achieve predetermined outcomes.

Investors may be private individuals, foundations, or financial institutions. These investors make project-specific investments in a special purpose vehicle created for such investment. They receive from the special purpose vehicle their investment principal plus pre-determined interest, often contingent upon the achievement of certain outcome goals. For some investors, predetermined interest will be zero, and their investment is a donation. For other investors, predetermined interests will be greater than zero, and their investment will yield returns. Because the contract pays only for success, in the event of a non-performance, investors may lose part of their investment. Service providers are for-profit or nonprofit organizations that will be delivering social services to the population that is defined in the pay-for-success contract.

III. What is the Value of a Social Impact Bond?

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SIBs fit into a broader family of pay-for-performance and results-based financing schemes, which have shown past success in addressing social problems in international development. Existing programs that link funding to results take a variety of forms, from official development aid paying governments directly for high-level outcomes achieved (“results-based aid,” or RBA) to paying service providers for completing a series of activities or outputs (“results-based finance,” or RBF).4 These programs are also known as performance-based aid and performance-based finance, respectively.

However, SIBs are distinct from current initiatives in at least four ways:

1. They involve private sector participation to solve a pre-financing gap. This broadens participation by enabling service providers who may not have access to the initial capital otherwise to participate.

2. They can generally transfer more performance risk. This allows governments to write more high-powered performance contracts with providers.

3. Their structure focuses on outcomes, such as decreased incidence of incidence disease, rather than outputs, such as the number of vaccinations provided.

4. They focus attention on the relationship between a donor, government and a service provider.

Because of their inherent structure, SIBs address two potential problems with existing RBF and RBA schemes. The first is uncertainty about the source of upfront funding for interventions, especially where governments or agencies have limited resource. The second is concern that the service providers or recipient governments will be unable to bear implementation risk, or the risk that the funded interventions don’t deliver the desired impact. This latter barrier is especially important for expanding promising interventions which have not yet been implemented or researched at scale.

A SIB contains characteristics similar to those found in the Global Alliance for Vaccines and Immunization (the “GAVI Alliance”). The GAVI Alliance was created in 2000 to increase access to immunization for children in developing countries.5 In 2006, with the creation of the International Finance Facility for Immunization (IFFIm), the GAVI Alliance created an innovative financing mechanism whereby it issues “vaccine bonds” on international capital markets backed by the long-term expected contributions from nine donor governments. Like in a SIB, the use of these bonds allows for the conversion of pledges, or future funding, into present-day cash reserves, allowing the GAVI Alliance to nearly double its funding for immunization programs.6 The GAVI Alliance uses the proceeds from these bonds to negotiate purchasing and distribution agreements with major manufacturers and distributors of a select number of vaccines, in addition to other programs strengthening health systems worldwide.7

4 “Development Impact Bond Consultation Paper,” The Center for Global Development and Social Finance, June 2013.5 Citation needed. 6 http://www.iffim.org/about/overview/7 Citation needed.

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Similarly, although SIBs may not increase the total amount of funding available in the healthcare system, they may introduce a new source of funding. The SIB allows service providers, such as clinics and healthcare facilities, to access private investment capital to fund operations over the duration of a program. Investors would lend in expectation of payment from the government once the service provider delivers successful outcomes. Such access to large amounts of upfront funding may be especially valuable to small healthcare providers who may otherwise have limited access to private capital.

Many current performance contracts assume that the organization being contracted can operate without additional capital before it receives the contractual payment or can secure that capital. This assumption does not hold for providers that are small or for ones who cannot access financial markets because they lack experience in doing so. When this assumption does not hold, otherwise eligible providers may choose not to bid on pay-for-success contracts. This reduces the pool of applicants. This reduction in the pool of applicants may reduce the quality of the pool if some of the providers that do not apply have high quality programs. Finally, some providers who apply and use self-financing, but have limited access to financing, may allocate capital more efficiently in a SIB that allows them to obtain working capital from investors. For example, providers may use up-front capital to make long-term improvements in infrastructure or back-end operations that would generate improved outcomes during the lifetime of the SIB program, but may not have been cost-effective for smaller programs or with smaller payments that providers receive over time. Therefore, the quality of a provider’s program may be higher if the provider receives funding through a SIB. As such, SIBs may allow a wider range of healthcare providers to participate in pay-for-performance contracts than would participate without a SIB.

Insufficient funding for healthcare services has led to an underinvestment in healthcare infrastructure, which remains a major barrier to the achievement of universal healthcare in Southeast Asia. The World Bank has estimated that the East Asia Pacific Region and South Asia need $407 billion and $191 billion in infrastructure investment, respectively, to sustain economic growth.8 In Southeast Asia specifically, the World Health Organization has identified underinvestment and a lack of infrastructure as key factors contributing to low utilization of health services.9 Globally, the World Economic Forum’s Global Risks 2013 report has identified underinvestment in infrastructure as one of the most pressing risks threatening the world in the next decade.10 The identification of underinvestment in infrastructure as a global risk remains unchanged from the 2010 report, which identified it as one of the most interconnected, affecting infectious diseases, chronic diseases, food price volatility, fiscal crises, oil prices and natural catastrophes. The World Economic Forum specifically identified the need to identify “innovative ways to finance development while managing risks” while seeking out investors with longer term investment horizons to support infrastructure development.11

IV. Using Social Impact Bonds to Advance Universal Healthcare in Southeast Asia

8 http://online.wsj.com/article/SB10001424127887324432004578303692026259624.html9 http://www.searo.who.int/entity/nutrition/topics/regional_situation/en/10 http://reports.weforum.org/global-risks-2013/section-seven-online-only-content/data-explorer/11 http://www.weforum.org/pdf/globalrisk/globalrisks2010v1/infrastructure.htm

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Although SIBs are not a panacea, they may become one among several useful tools to advance universal healthcare throughout Southeast Asia.

A major barrier to the expansion of universal healthcare in Southeast Asia is the cost-effectiveness of services and the inefficiency of service provision. SIBs can help expand healthcare by addressing this fundamental problem. The inefficient provision of healthcare services is a major barrier to the expansion and improvement of healthcare delivery worldwide. For example, the European Health care Fraud and Corruption Network says that each year about $300 billion, or 6% of global healthcare expenditure, is lost to mistakes or corruption.12

The concept of efficiency in healthcare provision can be separated into allocative, technical and dynamic efficiency. Allocative efficiency asks whether every additional dollar is invested in the most optimal way – for example, for treatment versus prevention. Technical efficiency asks whether a combination of money, doctors and medicine is optimal, or in other words, whether it minimizes costs and maximizes outcome for a given procedure. Dynamic efficiency asks whether the rate of change in the healthcare system is optimal.13 SIBs hold potential for improving all three types of efficiency.

SIBs can increase allocative efficiency by motivating the transition of a healthcare system from treatment to prevention. Many acute healthcare conditions, such as HIV, are cheaper to prevent than to treat. Yet overburdened healthcare systems that may be interested in preventing the conditions they treat struggle to find additional financing to facilitate that transition. Through a SIB, a healthcare ministry can create a contract to increase prevention of a costly ailment, and pay for that service from the expected reduction in resulting treatment costs.

One example of the gains from shifting to prevention is the importance of preventing mother-to-child transmission of HIV. In 2010 in East, South and Southeast Asia approximately 53,000-95,000 pregnant women lived with HIV and need antiretroviral medicine for preventing mother-to-child transmission.14 Assuming a transmission rate of 22 percent and a discounted lifetime cost for an HIV-infected child on antiretroviral drugs of $3195, the healthcare burden may exceed $66 million.15 Prevention of mother-to-child transmission, however, can cost just between $816 to $1,331 per infection averted, depending on the assumptions used.16

However, in many cases, elimination of expected treatment costs will only partially offset the cost of a preventative intervention.17 Further, if demand for a treatment exceeds supply of that treatment, then a SIB that funds preventative services and thereby reduces demand for treatment services may generate no cashable savings. Finally, unless the system is designed carefully,

12 WHO UHC Report, p. 61. 13 Richard M. Scheffler, Pay For Performance (P4P). Programs in Health Services: What is the Evidence?. World Health Report (2010). Background Paper, 31.14 GLOBAL HIV/AIDS RESPONSE: Epidemic update and health sector progress towards Universal Access, Progress Report 2011 (WHO, UNICEF, UNAIDS), p.154. http://www.who.int/hiv/topics/mtct/data/en/index1.html15 “Cost-Effectiveness Analysis of Option B+ for HIV Prevention and Treatment of Mothers and Children in Malawi” http://www.who.int/hiv/pub/mtct/HIV_MCTC_B_MalawiPlosONE.pdf, Table 2. 16 “Cost-Effectiveness Analysis of Option B+ for HIV Prevention and Treatment of Mothers and Children in Malawi” http://www.who.int/hiv/pub/mtct/HIV_MCTC_B_MalawiPlosONE.pdf, Table 3.17 Cite - Liebman Fed Reserve Paper

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realized cost savings may not be cashable. Budgetary rules may lock in healthcare dollars, preventing unused money from flowing to cash-strapped programs.

SIB contracts emphasizing the achievement of outcomes can also improve technical efficiency to motivate a healthcare provider to allocate better existing resources within a particular intervention to improve outcomes. For example, healthcare providers that receive capitation payments face incentives to minimize cost per reimbursed procedure. As such, a healthcare system may motivate providers to transition toward more effective procedures by changing capitation levels between procedures. SIBs offer a mechanism for a healthcare system that would incentivize providers not only to minimize costs, but also to maximize outcomes. For example, the New York Medicaid Program in the United States has recently explored a pay-for-performance scheme to reduce the number of hospital readmissions.18 In this scheme, hospitals with higher case-mix-adjusted readmission rates receive lower capitation payments. If these payments offset revenue loss from having fewer patients and a potential increase in per-patient cost of treatment, then they may motivate hospitals to use evidence-based readmission reduction interventions, such as the use of in-hospital patient advocates.19

It is too early to tell whether SIBs can make significant improvement in dynamic efficiency of the healthcare system. The ability of SIBs to improve dynamic efficiency may be increased if they are designed within a broader initiative that funds the discovery of effective healthcare interventions. The partnership between private investors and healthcare providers may improve the quality of the providers’ performance management systems and thereby increase the rate of learning for the provider.

A key advantage of applying the results-based SIB model to healthcare is that it may improve the quality of services, and partly as a consequence of this, increase utilization and health care coverage. As will be discussed below, increased quality comes from the results-driven framework of a SIB, as well as through its long-term focus.

Numerous studies show that the poor quality of healthcare services is a major determinant of low utilization rates. For example, in a review of performance-based healthcare, the German Society for International Cooperation noted that perceived quality is an important determinant of healthcare utilization - indeed, that “often the women themselves opt against delivering in health facility due to either the poor quality of services, financial barriers, the lack of information on the risks of motherhood, or due to prevailing traditional norms.”20 Similarly, a comparative review of studies of developing world maternal healthcare finds that perceived quality of care can be, depending on context, a key determinant of utilization.21

Country-specific examples have also yielded strong evidence. A “strong relationship between perceived quality of care and utilization of […] maternal and child health services” was

18 http://nyshealthfoundation.org/uploads/resources/reducing-hospital-readmissions-payment-incentives-september-2011.pdf19 http://nyshealthfoundation.org/uploads/resources/reducing-hospital-readmissions-payment-incentives-september-2011.pdf, p. 1720 GIZ Evidence Brief - Does Results-Based Financing Improve Maternal and Newborn Health? p.821 http://www.who.int/bulletin/volumes/85/10/06-035659.pdf

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found in Kenya, with poor quality of care being cited by most women interviewed.22 In Vietnam, a survey of women found that utilization of primary health care was determined by “client-perceived quality of services and socio-cultural and economic factors, rather than geographical access.”23 In India, a similar study found that socioeconomic status was not a barrier to maternal health care utilization so long as the perceived benefits were greater than the cost, with the perceived low-quality of government services leading to a preference for delivering at home. 24

As such, if a SIB funds a healthcare service, an evaluation shows that the service generated successful healthcare outcomes, and potential patients who might demand that service perceive that the SIB generated a higher-quality result, the utilization of that service may increase. This is aided by the fact that SIBs typically include a rigorous evaluation, such as a randomized controlled trial, that helps the government determine whether the outcome for which it is paying was created by the program or by chance.25 Studies have shown that supply-side RBF schemes can also improve the quality of services which are monitored and rewarded, which in turn increases utilization. For example, in Rwanda, RBF was shown to significantly increase the probability of a woman receiving a tetanus vaccination during a prenatal visit. However, evidence is not yet available to suggest whether quality improves for non-incentivized services, or whether incentivizing and monitoring some services, leads to reduced quality in others.26

One reason SIBs may increase the quality and impact of services over time is due to their long-term structure. One advantage of SIBs is that they focus a government’s attention on a particular political priority over a longer period of time. To date, most SIBs programs have ranged between four and six years in length.27 Some commentators have suggested that this prolonged focus on a social program across government agencies, unusual in its length, may lead to improved impact.28 Such a prolonged focus may improve impact because over time agencies and service providers learn to collaborate. It may also improve impact because service providers have enough time to experiment and learn from program modifications. These benefits were reported by the Rockefeller Foundation in analyzing the SIB funding recidivism services at the HM Peterborough prison in England, which noted that “whereas prior funding for reentry programs was piecemeal and short-term, the SIB provides long-term, flexible funding streams.”29

Indeed, there is evidence for returns to experience in implementation over time for healthcare programs in maternal health in Southeast Asia. For example, a case study of maternal healthcare in India found that the state of Tamil Nadu performed better than other Indian states due to its “long-term focus on maternal mortality through pilot-testing of evidence-based interventions on a smaller scale and then upscaling successful ones, with focus on the systematic implementation of interventions suited to local conditions to provide consistent higher-quality

22 http://www.ncbi.nlm.nih.gov/pubmed/1646374723 http://www.sciencedirect.com/science/article/pii/S0277953604001868?np=y24 http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=7983325 Cite the Third Sector Capital Partners case study on Massachusetts SIB, which mentions the use of an RCT. 26 GIZ Evidence Brief - Does Results-Based Financing Improve Maternal and Newborn Health? p.827 Citation needed.28 Citation needed.29 Rockefeller Report, p. 30 http://www.rockefellerfoundation.org/uploads/files/655fab01-83b9-49eb-b856-a1f61bc9e6ca-small.pdf

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services in rural areas.”30 BRAC in Bangladesh has found success due to their long-term focus with much programmatic iteration as the organization expanded coverage and services and as workers learned through experience. Their health initiatives beginning in 1972 have steadily evolved over time, and the organization “gained immense knowledge, particularly in improving child health throughout the 1980s.” Their experience in developing oral rehydration solutions to treat diarrheal diseases eventually evolved into their comprehensive Women’s Health and Development Programme.31 BRAC’s Director of Health, Faruque Ahmed, credits BRAC’s slow scale-up for its success, allowing it to learn how to expand and to gain the confidence to grow.32 Similar to BRAC’s success in Bangladesh, the initial success of performance-based schemes in Rwanda allowed for lessons learned to be applied to the successful scale-up of the health programs nationally, which benefited from the “more than five years of sustained experience in providing a broad range of services and operating a large number of facilities” of the initial schemes.33 And “although the scope and scale of the initial pilots were relatively modest, they nonetheless provided important information about details of design and implementation that informed the national scale-up.”34

Similarly, some evidence shows that increasing the length of funding of a social program leads to an improvement in performance and quality. For example, studying health systems in low-income countries, Lafond finds that the methodology behind traditional aid, with its inward focus and short-term investment cycles, conflicts with long-term needs, especially when donor agencies demand immediate evidence of success.35 Studying a program to improve Maternal and Child Health in Yunnan, China, Edwards et al. find that long-term commitments are vital to sustainable interventions, as “short funding cycles conflict with the time needed to stimulate system change.” Because of the project’s long-term nature, participating organizations were able to collaborate and adopt innovations while effective innovations were diffused throughout the province and eventually into national health policies.36 Other research has shown that the length of time a social intervention operates when first implemented is strongly related to how likely the program is to continue in the future.37 Similarly, Steckler and Goodman find that short grant periods of 3 years are too short to successfully institutionalize new health programs.38 Governments are often forced to focus on projects with short-time horizons, while donors are similarly hesitant to make large-scale investments in institutions when the benefits may not materialize immediately. When both governments and donors are more interested in short-term gains, the sustainability of interventions is harmed. 39

30 http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2761784/31 http://www.bracresearch.org/monographs/Monograph_32.pdf p. 29 (also see table p. 30)32 http://opinionator.blogs.nytimes.com/2011/02/18/what-makes-community-health-care-work/33 Rwanda: Performance-Based Financing in the Public Sector Rusa p. 205-20934 Rwanda: Performance-Based Financing in the Public Sector Rusa p. 19035 Lafond, A. K. (1995) Improving the quality of investment in health: lessons on sustainability. Health Policy and Planning, 10 (Suppl.), 63–76. Cited in “Planning for the sustainability of community-based health programs: conceptual frameworks and future directions for research, practice and policy” (1998) by Mona C. Shediac-Rizkallah and Lee R. Bone, p. 100.36 (p. 45 Sustainability: The Elusive Dimension of International Healt projects by Nancy C. Edwards.”)37 Cited in “Planning for the sustainability of community-based health programs: conceptual frameworks and future directions for research, practice and policy” (1998) by Mona C. Shediac-Rizkallah and Lee R. Bone, p. 10038 Cited in “Planning for the sustainability of community-based health programs: conceptual frameworks and future directions for research, practice and policy” (1998) by Mona C. Shediac-Rizkallah and Lee R. Bone, p. 100

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In addition to increasing quality, the available evidence suggests SIBs can also help increase healthcare coverage in the region. For example, studies have shown that chosen indicators that are incentivized in RBF programs show “significant improvement.” Strong evidence exists that utilization rates increase dramatically with voucher schemes incentivizing the utilization of maternal, newborn and child health care services, as well as the proportion of women using antenatal and postnatal care services and whose deliveries are assisted by trained providers.40 A World Bank-funded comparative review of performance-based and non-performance based health schemes in the Butare, Cyangugu, Gikongoro and Kibungo provinces of Rwanda found that provinces with performance-based financing showed the largest increases in curative and preventive services.41 For example, PFB-based schemes saw an increase in measles coverage by 11% while non-PFB based schemes saw an increase of just 1%. Similarly, PFB-based schemes saw an increase of institutional deliveries of almost 11% between 2001 and 2004, while non-PFB schemes saw an increase of just 3%. Innovative strategies introduced under PFB-based schemes included “the establishment of additional centers to bring services closer to beneficiaries, paying traditional birth attendants to bring women to health centers, and providing clothing for newborns as an incentive to attract women to deliver.”42

SIBs may also increase coverage by decreasing out-of-pocket healthcare expenditure, a major barrier to the utilization of healthcare services by the poor. High levels of out-of-pocket expenditure have been cited as a significant barrier to the expansion of universal healthcare.43 A quasi-experimental evaluation of the Rwanda results-based financing scheme shows that consumers paid less out of pocket in the RBF clinics than in non-RBF clinics.44 In that scheme, payment was conditioned on quantity of healthcare delivered. Healthcare providers may have been motivated to reduce charges to prospective patients to increase utilization. This suggests that SIBs that include output metrics in the basis of payment to providers may similarly motivate providers to reduce out-of-pocket fees.

As such, SIB and other results-based finance programs may improve process and output parameters such as utilization and coverage, care equality and equity. However, the lack of robust health-outcome data, the variability of program design, and the nascent stage of many RBF programs necessitates that attention be paid to the specific contexts and modes of implementation for each program.45

Although SIBs hold promise for enabling the improvements described above, this innovation is unlikely to address a vast portion of barriers to implementing universal healthcare initiatives in Southeast Asia. A recent WHO report cites lack of funding and large out-of-pocket

39 Bamberger, M. and Cheema, S. (1990) Case Studies of Project Sustainability: Implications for Policy and Operations from Asian Experience. The World Bank, Washington, DC pp. 83-86.40 GIZ Evidence Brief - Does Results-Based Financing Improve Maternal and Newborn Health? p.841 Eichler and Levine, pp. 196-199. Also: http://www.ncbi.nlm.nih.gov/pubmed/21515164 42 Eichler and Levine, p. 197.43 http://www.who.int/healthsystems/topics/financing/healthreport/20public-private.pdf44 “Consumers paid less out of pocket in Butare and Cyangugu than in the noncontracting provinces. Consumers also accounted for about 85 percent of total spending in 2002 in all provinces, 68 percent in noncontracting provinces, but only about 51 percent in the contracting provinces.” Eichler and Levine, p. 199.45 GIZ Evidence Brief - Does Results-Based Financing Improve Maternal and Newborn Health? p.7

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payments as two barriers to universal healthcare. 46 Although SIBs may introduce a new source of funding, they are unlikely to increase drastically the amount of funding available for expanding healthcare. Also, SIBs may make only marginal progress in reducing large out-of-pocket payments.

V. Characteristics of Potential Healthcare Interventions

This section describes the types of healthcare interventions that may be applicable to financing through a SIB. Liebman (2011) suggests that successful SIBs must have the following characteristics:47

1. Be a political priority, with a strong commitment from government champions.2. Have a measurable outcome, with credible outcome metrics that generates

incentives that induce the right behavior from the service provider.3. Have a reasonable time horizon between service delivery and observable

outcomes.4. Be evidence-based, as investors must have confidence that an established,

reputable organization will deliver an effective, evidence-based intervention. To the extent that existing evidence fails to convince investors of the likelihood of success, they will demand higher premiums to offset higher risk.

5. Address a gap in service provision, as SIBs are best fit for complementing existing social programs by filling a gap in government services. Otherwise, SIBs will be perceived as competing against existing government programs. Furthermore, because these programs are experimental, they should be tested before being deployed for core social services.

6. Have a high social return, as SIBs are a cost-effective but expensive way to finance a social program. Social returns must be sufficiently high to warrant the cost of capital and cost of structuring.

7. Focus on a private organization. Although results-based financing contracts have been written with governments and with individual healthcare workers, all SIB contracts to date have been written with private organizations. Although private organizations can pass the incentive down to the frontline worker -- in whole or in part -- the organization is in a better position than an individual frontline worker to improve healthcare delivery in response to a financial reward placed on results.

There are many healthcare interventions that could potentially form the basis of a SIB. For example, in at least three SIBs that are currently being developed, governments are seeking to re-focus their healthcare system on prevention rather than treatment, especially for chronic illnesses with high total treatment costs:

1. In Mozambique, Dalberg Global Development Advisors, a consulting firm, is designing a SIB to reduce the incidence of malaria.48 This SIB would fund

46 “Health Systems Financing: The Path to Universal Coverage,” The World Health Report, 2010, pp. 47 Citation needed.48 http://www.smartplanet.com/blog/global-observer/social-impact-bonds-gear-up-for-mozambique/11117

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delivery of preventative services, such as the distribution of insecticide-carrying bed nets or the spraying of at-risk communities with safe pesticides, rather than funding costlier treatment of individuals who have become carriers of malaria. Mining companies active in the region may be the outcome funders in this SIB, as they know that a healthy workforce is more productive.

2. In the US, the nonprofit Collective Health and the California Endowment are designing a SIB in Fresno, California that funds services to reduce the home-based triggers of acute asthma.49 If the intervention shows that the preventative service reduces the frequency of asthma-related hospital visits, and that reduction reduces the payment insurance companies make to these hospitals, then the program will be scaled-up with insurers as the most likely outcome payers.50

3. In the UK, Social Finance has commissioned research that proposed chronic asthma, self-management of diabetes, and improved treatment of patients with chronic illnesses as promising SIB applications.51

Finally, the Center for Global Development’s recently released consultation paper on social impact bonds in development noted the potential of health-based SIBs, such as the expansion of antiretroviral treatment in order to prevent HIV and tuberculosis in Swaziland52 and the reduction of Rhodesian sleeping sickness in Uganda through the treatment of cattle which carry the disease.53

VI. Challenges of creating a SIB

This section notes three main challenges that designers of a healthcare SIB in SEA will likely face.

First, SIB designers will have to find ways to reduce the upfront cost of creating a SIB. Initial SIB pilots have shown to be significantly more expensive than the cost of service delivery alone for two reasons. First, in a SIB, government or donors pay a premium above the cost of service delivery for the certainty that the outcome has been delivered. Second, SIB designers will likely need outside advice. Governments in developing countries have needed outside advice to understand how their procurement systems and existing contract types can be used to create a SIB. Some governments in developed countries have resolved these problems by hiring outside legal counsel and by passing legislation.54 Others have hired additional staff to focus on SIB design.55

Second and related, SIB designers will have to find ways to reduce the duration and complexity of up-front work, such as legal assistance in drafting a novel type of contract and the cost of performance monitoring by an intermediary. Some governments have overcome high 49 Citation needed.50 Citation needed.51 http://socialfinanceus.org/sites/socialfinanceus.org/files/a_new_way_to_invest_in_better_healthcare.pdf52 CGD Report, p. 5453 CGD Report, p. 4654 Citation needed.55 Citation needed.

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costs of initial pilots by obtaining pro bono services from outside experts, by sharing the cost burden with other government agencies, and by receiving financial support from foundations and other outside sources of capital.56 Furthermore, observers expect many of these costs to decrease as the process for creating a SIB becomes standard.57

Third, SIBs must be designed carefully to ensure that a healthcare SIB does not motivate unwanted behavior. For example, extrinsic motivation, such as a monetary incentives given to frontline health workers, may crowd out intrinsic motivation, such as an altruistic desire to help patients, personal values, and self-esteem. Ellingsen and Johannesson, 58 for example, propose a principal-agent model which argues that agents care about social esteem and value the approval of those whom they themselves approve of more. A principal’s decision to impose a controlling incentive scheme to induce better performance may have the inadvertent effect of shading the agent’s assessment of the principal’s character, thus showing how “an incentive that in insolation would have a positive effect on the agent’s behavior has a negative effect...because of what the incentive tells the agent about the principal.”59 One review found that in low- and middle-income countries, “financial incentives may lead to demoralization, reductions in intrinsic motivation, […] less trust between patients and providers,” and, in the long-run, may decrease the quality of the healthcare workforce by selecting against those individuals who are intrinsically motivated to perform well.60

Healthcare SIBs should be designed to maximize the overall motivation of healthcare workers in the long run. SIB designers could involve workers in designing incentives to balance their extrinsic and intrinsic motivation. Designers may include components that signal support for high-performing workers, as studies show that this increases motivation.61 Failure to design incentive structures well may increase the cost per unit of outcome relative to a comparison group where intrinsic motivation exists.

In addition to avoiding crowding out intrinsic motivation, SIBs must be carefully designed so as to ensure that evaluation systems are not gamed. In some cases, performance awards for specific outputs may cause frontline health workers to re-optimize services in a way that maximizes those outputs but reduces or does not improve overall health outcomes of patients. When an individual is responsible for multiple tasks, the literature on “multitasking” suggests that rewarding one task leads to a reduction in effort towards other tasks which are not similarly incentivized. For example, one study in Kenya found that rewarding decreases in malnutrition rates in schools lead to a decrease in teaching time by 15%, while another study in China found that incentivizing reduced student anemia may have led to reduced teaching effort, and in some cases, lower test scores.62 At the same time, when multiple outcomes are incentivized, providers may focus effort on outcomes considered easier to achieve, with the

56 Citation needed.57 Lessons Learned So Far,” Community Development Investment Review, The Federal Reserve Bank of San Francisco, Volume 9, Issue 1, 2013. 58 Ellingsen, Tore, and Magnus Johannesson. 2006. “Pride and Prejudice: The Human Side of Incentive Theory.” American Economic Review 98 (3): 990–1008.59 Ellingsen and Johannesson, 992.60 Miller, Grant, and Kimberley S. Babiarz. "Pay-For-Performance Incentives in Low- and Middle-Income Country Health Programs." Encyclopedia of Health Economics(2013): n. pag.., p. 2261 Eichler and Levine, p. 19

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highest marginal return. For example, in Rwanda, performance incentives were “more effective in increasing institutional delivery rates among pregnant women who were already in contact with community health workers,” than in the harder task of initiating prenatal care with women who did not use the healthcare system, especially since the payment for increasing institutional deliveries was much higher than that for increasing prenatal care visits.63 Unintended consequences of incentivizing good patient outcomes can also extend to ‘cherry picking,’ where providers only choose to serve patients who are the healthiest or the easiest to treat, as opposed to those who are very sick or located in very remote areas.64

Incentivizing specific services may also lead to inadvertent side effects like motivating the falsification of performance evaluation sheets.65 In one scheme in India, when a program started paying staff more for delivering babies after office hours, the number of nighttime deliveries suddenly and sharply increased, indicating that staff falsified data to get additional payments.66 In another example from India, a performance incentive offered for continuing with tuberculosis treatment inadvertently incentivized some individuals to attempt to prolong the time they spent being treated. In response to this, however, the scheme was successfully altered so that payments were restricted to a maximum of six months after the beginning of tuberculosis treatment. 67

Poor design of initial SIBs may lead not only to suboptimal outcomes in the SIB program, but also to unwillingness from the government to pursue additional SIBs. This concern is especially strong if poor design leads to public perception that providers in the SIB are “teaching to the test” to maximize government payments.

VII. An Illustration of a Potential SIBs Applicable to Southeast Asia

This section describes a potential application of SIBs in Southeast Asia: the scaling up of . the diagnosis and treatment of tuberculosis, particularly MDR-TB.

A full one-third of the world’s tuberculosis (TB) burden is found in the South-East Asia Region. These 4.9 million prevalent cases have a monumental economic impact. For example, it is estimated that tuberculosis cost India an estimated 23.7 billion USD in 2006.68 The WHO estimates that at least a third of individuals with tuberculosis are never identified or are treated ineffectively outside of national treatment programs, leading to increased disease transmission,

62 Miller, Grant, and Kimberley S. Babiarz. ""Pay-For-Performance Incentives in Low- and Middle-Income Country Health Programs." Encyclopedia of Health Economics(2013): p. 1963 Miller and Babiarz, p. 2064 Miller and Babiarz, p. 2165 GIZ Evidence Brief - Does RFB Improve Maternal and Newborn Health? p. 1166 http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2761784/67 Beith, Alexandra, Rena Eichler, and Diana Weil. (2009). Worldwide: Incentives for Tuberculosis Diagnosis and Treatment (Chapter 12). In Eichler, Rena, Ruth Levine and the Performance-Based Incentives Working Group (Eds.). Performance Incentives for Global Health Potential and Pitfalls. Washington, D.C.: Center for Global Development68 http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2828794/pdf/09-073874.pdf

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the further development of drug resistant-tuberculosis.69 And although multi-drug resistant TB (MDR-TB) constitutes just 3% of new cases and 18% of re-treatment cases in SEARO, the high tuberculosis burden led to an estimated 90,000 cases in SEA - fully one-third of the world’s MDR-TB cases, of which fewer than 10,000 were enrolled for treatment.70

Undetected tuberculosis leads to “increase morbidity, mortality, and disease transmission.”71 According to Médecins Sans Frontières, the rapid diagnostic tool Gene XPert has “the potential to massively increase early detection of drug-resistant TB”, but it remains “prohibitively expensive in low-resource settings, exactly where the ability to detect TB within hours—as opposed to days or weeks—is most needed to save lives.”72 The scale-up of MDR-TB detection technology is severely hindered by a global decline in donor funding. 73 In November 2011, the Global Fund to Fight AIDS, Tuberculosis, and Malaria took the “unprecedented step” of cancelling ‘Round 11’ grants, effectively halting all new grants until 2014.74 Funding shortages such as this have undermined national treatment expansion plans, such as Myanmar’s five-year plan to expand treatment to a further 10,000 individuals with MDR-TB, a pattern repeated in other countries dependent upon such funding.75

Nonetheless, “initial analyses of the use of the Xpert MTB/RIF assay in countries with a high burden of tuberculosis suggest that this technology is likely to be a highly cost effective method of tuberculosis diagnosis, although this will of course be setting specific.”76 However, its high costs necessitate further operational research in low-income countries “to evaluate the test and its additional yield above high-quality smear microscopy and clinical algorithms before it is used at the peripheral level.”77 Given the amount of capital needed to expand diagnosis and the risk of scaling up a piloted intervention, there is ample opportunity for a social impact bond to increase the detection and treatment of TB, and particularly MDR-TB, increase treatment, decrease transmission, and ultimately reap societal benefits.

69 http://www.who.int/bulletin/volumes/88/3/09-073874/en/70 http://www.searo.who.int/entity/tb/rd_message_wtd-2013.pdf71 http://www.sciencedirect.com/science/article/pii/S014067361160438872 http://www.doctorswithoutborders.org/press/release_print.cfm?id=583873 http://www.doctorswithoutborders.org/news/issue.cfm?id=240474 http://www.doctorswithoutborders.org/press/release.cfm?cat=press-release&id=583875 http://www.doctorswithoutborders.org/press/release_print.cfm?id=583876 http://www.sciencedirect.com.ezp-prod1.hul.harvard.edu/science/article/pii/S147330991370008277 http://www.theunion.org/index.php/en/newsroom/news/item/2014-xpertr-mtbrif-for-ntps-in-low-income-countries-when-where-and-how-

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