ReThinking the Quest for Sustainable Financing: Innovative Financing Mechanisms: The Holy Grail?

Stacy Becker, Vice President, Programs | 08/24/2015

Part 3: ReThinking the Quest for Sustainable Financing Blog Series

Here’s a different question for you: what’s the purpose of “innovative” financing mechanisms?

Let’s be clear about one thing—financing mechanisms, innovative or not, do not create new sources of money. Suppose you establish a wellness trust.[1] Where does the money come from? How about a social impact bond[2]— where does the money come from to repay investors?

There are only a few sources of funds. These are: 1) money collected from the broader public, both individuals and businesses, through taxes and fees; 2) earned income, through the sale of goods and services; 3) philanthropy; 4) institutional budgetary savings; and 5) investment proceeds.

Say, for example, your community hopes to attract investors to a social impact bond that will reduce the cost of diabetes. The investors don’t produce the value—it is still your job to make sure the expected savings materialize. The investors are just loaning you the money until you can produce the savings to pay them back.

The purpose of any financing mechanism is to marry the value being created (e.g., reduced diabetes costs) to those who care about that value and are willing to pay for it (possibly health providers, payers, or the patients themselves in the case of diabetes).

So why do we need innovative financing mechanisms? There are many possible reasons, including:

  • Current rules do not allow funding for the intervention (for example, the Medicaid waiver rule mentioned in my earlier post).
  • We are unwilling to take on risk (what if my intervention doesn’t produce savings?)
  • We, as a society, or in political processes, are in disagreement about the value being created, and thus there is unwillingness to fund interventions that create that value through existing mechanisms or on a sustained basis.
  • The value being created is diffused over many recipients or takes many years to materialize.
  • There is a new type of value being created for which there is no ready mechanism of payment, perhaps because the market or technology have changed.

In the search for innovative financing mechanisms it would be good to ask which if any of these apply. In some cases we develop and utilize complicated or costly innovative financing mechanisms because the existing “system” makes it challenging to fund an intervention more directly. In these instances, innovative mechanisms are akin to a “hack” (in programming parlance)—they work around existing system structures and values, usually in an inefficient way. And if, for example, budget rules or risk aversion are a problem, it may be that the innovative financing mechanism gets trapped in these same problems (as did Minnesota’s attempt at social impact bonds).

The search for financing mechanisms should be focused on those that most efficiently and sustainably connect funding sources to the value created. Uber is an elegant example of this—no more reaching in your wallet when it comes time to pay the taxi fare. Perhaps we should look outside of health care for some examples. Which come to mind for you?

Stacey Becker is the director of sustainable financing at ReThink Health.