Innovative Financing: New Health Bonds Tested For Impact

Hospitals in the Indian state of Rajasthan will be assessed next month to gauge whether upgrades, paid for with a new international innovative financing model, have brought them up to the new government quality standards.

Gao, ICRC orthopedic center. An ICRC ortho-prosthetist helps double amputee woman to put on her two prostheses.
Gao, centre orthopédique CICR. Un orthoprothésiste du CICR aide une femme amputée des deux jambes, à mettre ses prothèses. ICRC website, 07.02.2018

At least 92 small private healthcare organisations (SHCOs) – small private rural and urban hospitals – are being upgraded this year, and 360 in total over three years. If they manage to improve, 600,000 pregnant women would have improved care during delivery and potentially save the lives of up to 10,000 women and newborns over five years, according to one of the funders, the US government’s donor arm, USAID.

The innovative financing model, called a development impact bond, has been put together by a consortium of philanthropic, NGOs, private organisations with USAID. But importantly, according to Priya Sharma, senior policy and innovative financing adviser at USAID, the model is advantageous for funders – whether they be governments or donors – wanting to make improvements with better outcomes.

Sharma, who manages the Utkrisht Impact Bond said the bond works something like this; a private philanthropic company called UBS Optimus Foundation has put the upfront cash to upgrade the hospitals. It’s called the impact investor. The cash is being given to a couple of NGOs that do the work on the ground – in this case Population Services International and HLFPPT (Hindustan Latex Family Planning Promotion Trust, a national not-for-profit health services organisation). They’re the implementing partners.

If they manage to raise standards at hospitals sufficiently – according to pre-agreed targets – USAID and the philanthropic wing of pharmaceutical company Merck, Merck for Mothers, will pay UBS Optimus a fee per hospital. These two organisations are known as the outcome funders. That’s why the hospitals are being assessed in the next month. It’s one of several rounds of verification that will decide which of the hospitals has reached enough of the standard to trigger a payment back to UBS Optimus.

Ideally, UBS Optimus will ultimately get its money back with a slight return.

Crucially, if the hospitals haven’t improved sufficiently, the outcome funders don’t have to pay a penny. And that’s where the model has its strengths, said Sharma.

“We face very little financial risk because that’s all being absorbed by the UBS Optimus Foundation. If in one of the rounds of verification none of the facilities hit their targets, we don’t pay out. We get to keep our resources or put them towards another project that might be working. We are buffered from that risk,” she said.

The model enables governments to pay for projects that work, she said. “If we are trying to be better and more efficient stewards of the resources we have, this is a really nice instrument that lets us do that. We can really prioritise where we put our money – behind projects that are working. That’s different from a traditional grant project,” she explained.

This development impact bond (DIB) is seen by USAID as just one of a growing new suite of innovative development finance tools that might be able to accelerate and catalyse progress. And this is why DIBs and their sister mechanisms, social impact bond (SIBs) are beginning to interest policymakers in global health (SIBS work in the same way except the outcome funders are national governments rather than external donors). Because there can be returns, outcomes are measured and payments are results-based, they might end up attracting big bucks from private sector investors willing to invest money in something with an additional social return, say proponents.

Impact bonds – whether SIBs or DIBs – aren’t brand new. The first was launched in the UK in 2010 for example. And there are growing numbers in all sectors – from social care to education – around the world. But in global health, they are still relatively rare. According to the Brookings Global Impact Bond Database, as of 1 October, there were 16 contracted health impact bonds in the world, of which three are development impact bonds. Half of all development impact bonds are health ones. Other governments that are outcome funders within health impact bonds tend to be from high income countries such as the Netherlands, Japan, Israel, India, Finland, Canada and Australia. And, of the 20 impact bonds in design (contracts not signed so not yet up and running) in low- and middle-income countries, seven are for health. Countries from South Africa to Cameroon have been looking at them.

Global health policymakers reckon these bonds might help plug the massive funding gap required to achieve global targets. Take the NCD targets. Indeed, early this year the WHO published a report entitled Saving lives, spending less: a strategic response to noncommunicable diseases in which it calculated the most cost-effective interventions called Best Buys, that by 2030 they will not only save millions of lives, but also see a return of US$7 per person for every dollar invested.

The document listed impact bonds as one of several financing options to support the Best Buys including raising excise taxes on tobacco and alcohol. It suggested that there be more public-private investment strategies that generate a measurable impact on health, as well as delivering a financial return to external investors. These, it said, were impact investments. “Impact investments can provide funding to launch or expand programmes that promote health. They are particularly important as a sustainable funding model, because if they are successful they fully cover their own costs,” according to the document.

The document also mentioned a SIB by the Canadian MaRS Centre for Impact Investing in 2016 to prevent hypertension. The outcome investor was the Government of Canada. And, as supporting evidence for impact bonds, the paper mentioned the Addis Ababa Action Agenda 2015, which stressed the need to align private sector investment with sustainable development.

Several agencies, from the Global Fund to DFID, are looking at development impact bond (DIB) models too. At its 39th Board Meeting in May, the Global Fund board was presented with update on innovative financing. This is reportedly part of a consultation on approaches to innovative financing. DFID is assessing the first humanitarian impact bond that will pay for three physical rehabilitation services, run by the ICRC, in Nigeria, Mali and Democratic Republic of Congo to help people living with physical disabilities in conflict affected areas to regain mobility. Impact Investors include New Re, part of Munich Re Group and the outcome funders are the governments of Belgium, Switzerland, Italy, the UK and la Caixa Foundation.

Impact bonds are just a few of the innovative financing models being explored. There are others, from sin taxes (taxes on alcohol and sugar) to the international financing facility for immunisation. Certainly, innovative financing models was mentioned by the WHO Independent High-level Commission on Noncommunicable Diseases (NCDs), in its 19 “bold recommendations” for heads of state and government to accelerate action on reaching SDG target 3.4 on NCDs by 2030.

The problem with these bonds, however, is that they are complicated. The humanitarian impact bond took 17 months and the Utkrisht impact bond in Rajasthan was two years in the making. They require a great deal of analysis and detailed calculations, and all the partners must agree on the metrics and targets. And there are an awful lot of partners. As well as the implementing partners and outcome funders, there is a separate industry, almost, in companies that act as project managers and the companies that verify the targets have been reached. Others worry that they cost too much, won’t be sustainable, that public funds are leveraging private profit or that private investors won’t put up large amounts of cash necessary to plug funding gaps required to reach NCD or SDG targets.

That said, more is being discovered about impact bonds, as more launch. Emily Gustafsson-Wright, a fellow in Global Economy and Development at the Brookings Institution, said: “Our view is that impact bonds make sense for interventions that are preventive (which covers many NCDs) and that are more human behaviour-dependent for their success. In particular we see impact bonds serving quite niche populations, the types of populations that may fall between the cracks in the public sector.”

Certainly, many existing health bonds have attempted to prevent illness, such as encouraging exercise amongst high risk individuals to prevent hypertension or diabetes. Or they may reduce indirect health costs by, for example, reintegrating cancer patients back into work or Introduce physical rehabilitation after some disability, as the Humanitarian Health Bond aims to do.

As more lessons are learned, impact bonds are becoming simpler too she added. “We are seeing a shift towards outcomes funds which in essence pool multiple impact bonds,” she said. “This is a way to achieve efficiencies in terms of design and implementation and possibility including evaluation.”

USAID’s Sharma agreed that the global health community is currently experimenting with new models, and are determining where best social impact bonds may work. The government of Rajasthan has committed to taking over the Utkrisht project after three years – although it’s unclear whether it will do so on an impact bond basis for example.

“We are still early stages in our understanding about the appropriate uses for impact bonds, pay-for-performance more broadly, and the larger universe of innovative funding,” she said. “Let’s think through what challenges are and the most appropriate solutions. Is it an impact bond, or a credit guarantee or some kind of pooled funding?”

“Let’s be very strategic about it,” she added. “We need much more data before we pick one going forward.”


Image Credits: ICRC/Sidi Diarra/23/01/2018/ V-P-ML-E-00226.

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