Does Pay for Success Work? Define 'Success'

An experiment in performance-based financing for government services, called pay for success, has raised questions about what should count as success after mixed results were announced at two demonstration sites in July and October.

The sites — one in Rikers Island, New York, and the other in Salt Lake County, Utah — are part of a growing bipartisan effort to tie social services funding to proven results. Legislation in the House and Senate that would expand the concept, also called social impact bonds, has drawn support from Democrats and Republicans, including President Obama and the new speaker of the House, Paul Ryan.

The idea has also drawn criticism from public sector unions and others who question their reliance on third-party financing and payments to private investors, including private foundations and commercial firms like Goldman Sachs. Supporters counter that such financing makes the projects possible and that when they are successful they often save taxpayers money.

So far, the earliest results have generated differing views about whether they were successful. The first project, the results of which were announced in July, focused on reducing recidivism among youth at a city jail on Rikers Island in New York City. Seemingly a failure, it was subsequently shut down after falling short of its goals. Proponents argued, however, that it was actually a success because it accomplished something that is generally rare but central to the pay for success model: honestly assessing a new initiative and, when it fails, closing it down.

A second project, an early education program for children in Utah intended to reduce the need for more expensive special education, announced exceptionally strong results in October. Those results, however, were subsequently criticized by an investigative story in The New York Times, which suggested that the success metrics were too easy to achieve, an assertion that drew sharp disagreement in Utah.

In each case, the project's success or failure was a matter of debate largely because of performance information that is not normally available for most social programs. 

For the Obama administration, the very existence of such information is a win. Last month it announced a package of public and private initiatives that includes the expanded use of pay for success.

“We continue to be optimistic about this work,” said David Wilkinson, director of the White House Office of Social Innovation and Civic Participation. “PFS helps overcome the barriers to implementing quality, innovative programs for those in need by enabling government to pay only when its standards are met. At the same time it builds evidence about what works.”

Outside experts in the field also remain bullish, saying a significant transformation of federal, state and local government is within reach.

"Success and failure is not the right lens for looking at this right now. It's still early. We are still seeing rapid learning and maturation of the field," said Jessica LaBarbera, vice president at the Nonprofit Finance Fund.

"We shouldn’t make the perfect the enemy of the good," agreed John Grossman, co-president at Third Sector Capital Partners. "The goal is continuous improvement. Success comes in changing the way government and the social sector do business."

That has not stopped some critics from challenging the results anyway. Public sector unions like the American Federation of State, County and Municipal Employees are wary of the role private investors are playing, particularly for-profit banks like Goldman Sachs, which was involved in both the Rikers and Salt Lake projects. They believe that if such programs work, then governments should cut out the financiers who, they say, are taking limited public dollars that should be going to children.

On the opposite side of the ideological spectrum, some conservatives are similarly skeptical, arguing that social impact bonds may be a back door to government that is both bigger and ineffective.

"I have little faith in the Utah results," said David Muhlhausen, research fellow at the Heritage Foundation, which is supporting a broader bipartisan effort to increase the use of rigorous evidence in government. "The study design was weak. What they did may have been an improvement over the status quo, but that's not saying much."

Katharine Stevens, a research fellow at the right-leaning American Enterprise Institute who has favorable views of pay for success also has reservations. "We may need to figure out better ways to establish metrics — perhaps by relying more on parties who are external to the projects and the systems they are part of," she said.

Jeremy Keele, managing director of the University of Utah’s Sorenson Center, sees great potential. “I think the Salt Lake County results and The New York Times piece have sparked an important national conversation about how we should be measuring the impact of a program — that's a fantastic discussion for us to be having. Historically payments have just followed the services with little attention paid to results."

So how should success be defined?  "It's not a one size fits all methodology," said Jeff Shumway, vice president at the U.S. office of Social Finance, noting that sSometimes a rigorous study like a randomized controlled trial is needed. "In other cases with strong evidence, a simpler approach is needed to bring it to scale."

Another project addressing homelessness in Santa Clara, California, has combined the best of both worlds, coupling scalable outcomes-based metrics with the rigor of a randomized study to make sure the metrics can withstand scrutiny.

"What you ultimately want is a large database of outcomes to judge impact," said Third Sector Capital’s Grossman. "Once you get to the point where you can benchmark outcomes across organizations, you could see acceleration and liftoff."

Others look at the big picture. "Rikers is a difficult place to implement any program, even one with a solid evidence base," said Susan Gottesfeld, executive vice president at the Osborne Association, which helped run the project. "Now we know a lot more about what works and what doesn't in a New York City jail."

What counts as success? “I think it's positive social change," she said. "Saving money is nice, but what’s important is saving people."

Patrick Lester is the director of the Social Innovation Research Center.

(Image via iQoncept/Shutterstock.com)