A Social Impact Bond (SIB) is an innovative model for financing health care delivery. There is much excitement about the potential this method will have in bringing about desired health outcomes. Health programs that focus on one’s social determinants of health have proven to be instrumental in effectuating a positive change in one’s health. Social impact investing may take the form of equity, working capital lines of credit, and loans guarantees to early-stage companies [1]. Social Impact Bonds comprise contracts between private investors and the public sector through the use of an intermediary. An intermediary raises capital from private investors in turn for outcome-based payments made by the government to secure upfront financing. Investors are granted a Social Impact Bond, which represents their investment [2]. These funds support contracts with service providers to deliver the services needed to meet the desired health outcomes of public health programs.

Performance would be measured against an established benchmark and, if not met, the government would not have to pay. The payments made by the government increase performance, “up to an agreed-upon maximum payment level; whereas payments are funded by the cost savings to government achieved through the improvement in outcomes [3]“. Unlike government funding susceptible to budget constraints and spending limits, impact investors can readily fund programs that demonstrate a reasonable return [4]. In 2014, the Social Impact Bond Act (HR 4885) was introduced by the House of Representatives. Under H.R. 4885 § 2057, a 300 million incentive would be granted to support outcome-based payments and evaluations of SIB, whereas annual appropriations for oversight of SIB programs would be limited to 1 million a year. This bill encourages state and local governments to submit proposals to achieve desired social outcomes formulated through private-public partnerships. Some of the purposes of this bill are the following:

(1) To improve the lives of families and individuals in need in the United States by funding social programs that achieve substantial results.

(2) To ensure Federal funds are used effectively on social services to produce positive outcomes for service recipients and taxpayers.

(3) To establish the use of social impact bonds to address some of our nation’s most pressing problems.

(4) To facilitate the creation of public-private partnerships that bundle philanthropic and other private resources with existing public spending to scale up effective social interventions already being implemented by private organizations, non-profits, charitable organizations, and local governments across the country.

(5)To bring pay-for-performance to the social sector, allowing the United States to improve the impact and effectiveness of vital social programs. H.R. 4885 § 2051.

At the foundation of every Social Impact Bond are contracts formed between the government and an external organization that defines the responsibilities and expectations of both parties, the terms for which the external organization can receive their payment, and whether either party can terminate the contract before completion [5]. These agreements make up a complex contracting structure that requires collaboration among the government, service provides, investors, and an intermediary to achieve goals delineated in the contract and set by the program. [6]. Under the proposed House bill, limitations would be placed upon the contracts formed under the Social Impact Bond Act. For example, the Act requires the intermediary and service providers to have the necessary experience to execute the SIB and places a 10-year limit on any SIB with federal participation [7]. The excitement of Social Impact Bonds is having access to an alternative form of funding to achieve a desired social outcome not attainable without the help of socially conscious investors. By receiving funding upfront, organizations could become more productive in implementing a public health program, further becoming more efficient in providing services to the targeted population without fiscal year funding constraints.

[1] Maria Hernandez, et al., Impact Investing in Sources of Health, Collective Health (2012).

[2] Centers for Disease Control and Prevention, Public Health and Policy Innovations:  Social Impact Bonds.

[3] Community Development Investment Review 1, 1–137, (Ian Galloway ed.) p.25

[4] Maria Hernandez, et al., Impact Investing in Sources of Health, Collective Health (2012)

[5] Douglas J. Besharov, Jitinder Kohli, and Kristina Costa. Inside a Social Impact Bond Agreement-Exploring the Contract Challenges of a New Social Finance Mechanism May 3, 2012.

[6] Effecting Progress: Using Social Impact Bonds to Finance Social Services.  Rebecca Leventhal, 9 N.Y.U. J. L. & BUS. 511 (2013).

[7]  Federal Participation in Innovative Public Health Financing: The Social Impact Bond Act (HR 4885) and the Pay for Performance Act (S.2691).