Outcomes-Based Approaches to Health Care Finance Can Address Unmet Needs

In the United States, most would agree that we are over-indexed on health care spending and under-indexed on spending for social services. As a result, significant resources are allocated to manage conditions that could have been avoided by addressing, further upstream, the health-related social needs of individuals and populations. While passage of well-designed health policies to reallocate funding from health care to social services is challenging, health insurance companies, particularly those delivering care to Medicare and Medicaid beneficiaries, have recently stepped up efforts to address health-related social needs. In settings where health plans take risk for the total cost of care for the populations they serve, there is a business rationale to do so—and a potential to deliver improved outcomes and financial sustainability.

Despite the growing interest among health plans in community investment and partnerships to address the health-related social needs of their members, the Marketplace for these new business models remains immature. Health plans may not have a clear line of sight into the populations that will benefit most, nor from which programs. Service providers often face inadequate revenue streams relative to operating costs, which impedes their ability to offer programs at scale. Moreover, during the pandemic, tremendous demand has been exerted on the social safety net, with no commensurate systems-level capitalization of supply. This mismatch has highlighted the need for new and innovative financing models for community-based organizations (CBOs) that deliver services addressing health-related social needs such as food and housing insecurity, social isolation, and substance abuse disorders.

Our two organizations—Humana and Quantified Ventures—are currently testing such a model—outcomes-based financing. The goal is to foster investment in sustainable upstream solutions to address health-related social needs, health equity, and social justice, and in doing so offset downstream costs.

Outcomes-Based Financing To Build Quality Health Results

Outcomes-based financing provides a reliable structure for action-oriented, cross-sector collaboration to build and sustain local capacity for population-specific and communitywide solutions. This approach anticipates and informs, but does not wait for, policy solutions.

The outcomes-based financing model leverages capital from investors focused on addressing significant societal challenges by providing the most positive social impact for their dollars spent. For these investors, the desired outcomes—the returns on investment—are measurable and yield projected benefits. For example, insurers and others who invest in meeting the health-related social needs of individuals experiencing homelessness will benefit when adverse outcomes, such as avoidable hospitalizations and emergency department visits, are minimized. Failing to address such needs can lead to poor and costly health outcomes, but there is mounting evidence that programs to address unmet social needs are an effective way to improve outcomes.

Examples: Successful Outcomes-Based Financing Models

Outcomes-based financing has been effectively deployed in sectors as diverse as agriculture, education, and water to enhance cost-effectiveness, increase transparency, engage and align new stakeholders, and advance accountability.

Environmental impact bonds are an outcomes-based financing model currently in use by numerous municipalities. These bonds are designed to encourage broader use of sustainability measures such as nature-based infrastructure to efficiently manage stormwater, reduce flood risk, and improve water quality. The environmental impact bonds support prediction, evaluation, and disclosure of environmental outcomes of funded projects.

Environmental impact bond investors provide upfront capital to municipalities to finance local infrastructure projects. Investors are repaid by the issuer through any municipal source of revenue (general obligation bonds) or revenue directly tied to the project being financed (revenue bonds). In some cases, the bond repayment terms are tied to the achievement of specific environmental outcomes. For example, the DC Water environmental impact bond included the potential of a one-time outcomes-based payment, based on an evaluation of the stormwater runoff reduction produced by the installed green infrastructure after five years. Outcome metrics for other bond issuances have included gallons of stormwater storage capacity added and impervious acres managed by green infrastructure.

In the agricultural sector, outcomes-based funds have been tied to efficiently scaling the use of on-farm conservation practices that sequester carbon in soil and improve downstream water quality. Environmental outcomes, including metric tons of carbon dioxide equivalents sequestered and pounds of nitrogen and phosphorus prevented from entering streams and rivers, are then sold to federal, state, and local governments and corporations to meet their respective water quality and climate targets. Farmers receive payments both up front and after outcomes are produced and verified.

The Health Outcomes Opportunity

There is increasing interest among health plans in leveraging outcomes-based financing to build CBO capacity to respond to increasing demand for services. Many CBO programs subsist with a significant operating revenue gap that charity and public funds alone cannot close. Outcomes-aligned partnerships between health plans and CBOs can expand access to capital, create adequate and sustained revenue models, inform and accelerate forward-looking policy, build an applied evidence base, and set in motion the cycle of positive feedback that increases the speed and scale at which we drive positive health outcomes and address critical health-related social needs.

Several promising outcomes-based investments have emerged in recent years that will help to validate investors’ return on capital allocations to CBOs. These include: a new and high-impact model of care to reach individuals experiencing homelessness and housing insecurity in the nation’s capital; multi-million-dollar investments in affordable housing and food insecurity; multiple managed care organizations partnering with a service providers to combat social isolation among older adults; and the Collaborative Approach to Public Good Investments model that enables “communities to improve health and wellbeing, create a stronger community, and lower costs” through increased collaboration among health system stakeholders in a geographic region.

Our two organizations have partnered with Volunteers of America to develop and launch a first-of-its-kind Health Outcomes Fund to sustainably scale comprehensive treatment for pregnant, postpartum, and parenting mothers with substance use disorder (exhibit 1). This family-focused recovery program is an ideal candidate for outcomes-based financing in that it delivers substantial benefits to several parties beyond the clients served (for example, the children of mothers in the program have a more stable home, the community has less substance use, and there are reductions in neonatal intensive care unit stays resulting from neonatal exposure to substances). It also has a demonstrated track record of impact—producing near-term (for example, engagement in primary and behavioral health care) and longer-term (for example, recovery for mothers, healthy births at reduced costs, family reunification) outcomes that translate into meaningful social and economic value.

Exhibit 1: Health Outcomes Fund structure

Source: Quantified Ventures.

The Health Outcomes Fund provides Volunteers of America affiliates with new financing pathways to mitigate performance risk in the early stages of their new value-based payment arrangements with Medicaid managed care organizations. This includes a performance guarantee option that serves as a backstop and risk mitigation tool in case the CBO underperforms relative to expectations in early years. The fund can also serve as a subordinate or sole lender—taking the “first loss” position to encourage other investors to contribute to the capital stack.

Launching these contracts in a way that minimizes downside risks to participating programs, practices, and health care providers ensures critical engagement at launch, and supports CBOs’ transition toward sustainable, scalable solutions for the populations they serve. Additionally, this results-driven structure drives accountability and centers all actors on achieving the desired health outcomes for mothers, babies, and families.

Importantly, outcomes-based financing structures enable impact-oriented investors—individuals, foundations, companies, or funds—to deploy capital to achieve measurable social benefits alongside financial returns. And these social benefits are related to outcomes that offer financial value to payers in the Marketplace (for example, insurance companies benefit when members with diabetes have better health outcomes, reduced avoidable hospitalizations, and lower total health care costs). Outcomes-based financing methodologies also present opportunities to act now while building the evidence base. By using proxy measures that is, early predictors of success) as indicators of progress, these models increase capital flows to programs demonstrating promise for improved health outcomes and build an applied evidence base on which to advance future decision making.

Matching Supply Of Health-Related Social Services With Demand

The Health Outcomes Fund provides an instructive health-sector example of the power of outcomes-based financing models, and also highlights the need to employ these approaches at scale to achieve meaningful progress in addressing health-related social needs and social determinants of health.

While this experimentation with health-related, outcomes-based financing shows promise, the challenges we face are too large to address piecemeal. In many communities, there is significantly more demand for health-related social services—substance use treatment, workforce training, food access, and housing navigation—than there is supply. Huge amounts of capital are pouring into health care ($28.3 billion in US health care venture capital raised in 2021 alone), a substantial portion of which drives demand for health-supporting human and social services—mostly without commensurate levels of investment in community-based and nonprofit service providers (that is, the supply side of the equation). Increasing capital flows to outcomes-based health initiatives that scale service provider capacity can rebalance and more equitably address this market misalignment.

For outcomes-based financing to successfully take root in this sector, key stakeholders will need to think and operate in novel ways.

Health plans must commit to novel contracting structures and partnerships with community service providers who deliver value commensurate with compensation. Individual health plans do not have to go it alone; they can and should engage other in-market managed care organizations as investment partners or purchasers of outcomes to lessen transaction risks for all parties. Through collaboration, health plan investments can better support community infrastructure to meet social needs for members of all plans.

Community-based service organizations must embrace the value they deliver—as demonstrated in outcomes measures—to new payers and be willing to assume some level of performance risk. This shift in mindset and approach will open the door to new value-based payment streams and to compensation structures that reflect the tangible results these organizations deliver.

Government agencies must provide the flexibility needed for real-world experimentation that leads to greater payment innovation, value creation, and higher-quality services. As health plans and community-based organizations increasingly enter into value-based and outcomes-based arrangements, there is an opportunity and an impetus to review and re-evaluate federal and state policy around payments and reimbursements.

Investors must embrace moving more capital to facilities that deliver measurable health improvements, societal benefit, and reduced costs. In demanding both risk-adjusted returns and measured health impact reporting, investors can move away from the old paradigm that says returns must always be sacrificed when investing in social outcomes.

We should be impatient and creative in our collective efforts to reallocate investments that are most likely to produce better health. By aligning on valued outcomes and moving capital to pay for them, all parties can do well by doing good. In the process, we can accelerate the adoption of value-based purchasing, reduce total health care costs, and produce a better evidence base to guide future program investments in health-related social needs and social determinants of health.

Authors Note

William H. Shrank is chief medical officer of Humana in Louisville, Kentucky. Eric Letsinger is the founder and CEO of Quantified Ventures, a company that designs, capitalizes, and scales investible solutions in Washington, DC.