An article by Paula Lantz and Samantha Iovan, "When Does Pay-for-Success Make Sense?" was published in the Stanford Social Innovation Review in December.
There is growing excitement about the potential of pay-for-success (PFS) financing, which allows independent investors to finance social interventions aimed at issues or problems of interest to the public sector. If a PFS project achieves pre-determined outcomes, the public sector will repay the private investors, potentially with a return on the investment. The number of pay-for-success projects in the United States and worldwide continues to rise, with applications in an expanding array of human service, public health, education, employment, community corrections, and environmental interventions. Some examples of launched PFS interventions include supportive housing, post-incarceration job training, early childhood education, and nurse home-visiting for pregnant women. Our research shows significant potential for PFS to address the social determinants of health and wellness, which the World Health Organization defines as “the conditions in which people are born, grow, live, work and age.”
In this nascent field, however, there is little consensus regarding what makes an intervention appropriate for PFS. Some believe an intervention should have a strong evidence base for effectiveness, including randomized trials and cost analyses, before being considered for PFS financing. They argue that if the intervention’s effects and costs relative to benefits are unknown, a performance-based contract and payout schedule cannot be crafted without a huge amount of guessing and wishful thinking. Others argue that these academic standards of evidence are too high and unrealistic for PFS application in the real world. They argue that “evidence-informed” or theoretically plausible interventions with some promising pilot information should be sufficient for PFS financing. A third perspective holds that PFS financing is appropriate for innovative and unproven interventions as long as an investor is willing to take the risk.