‘Social Innovation Loan’ Pairs Private Lenders with Public Health Interventions

Andrew Kitchenman | March 25, 2013 | Health Care
By saving money on pricey ER visits, Assembly bill hopes to pay back private investors

Credit: Amanda Brown
Assemblywoman Nancy F. Munoz (R-Morris, Somerset and Union).
Throwing money at a problem is a charge that gets tossed around pretty liberally in an election year. But if some of that money could be locked on target, it might do a world of good — or at least that’s the thinking behind a new “social innovation loan” that looks to pair public services with private lenders.

More specifically, the proposal wants to use private capital to fund early intervention programs that would help break the dangerous and expensive cycle that starts to spin when state residents with chronic illnesses rely on hospital emergency rooms to take care of their medical problems.

If, as expected, the intervention programs cut down costs by reducing pricey ER visits, the lenders would share in that savings.

At least that’s the idea behind a bill recently passed by the Assembly (A-3289). But despite the support the measure has garnered in the lower chamber, a number of tough questions remain to be answered about its implementation.

Central to the proposal, for example, is the idea that cutting down on unnecessary emergency room visits will save the state money. But how much money, exactly? (It’s notoriously difficult to determine healthcare savings with any precision.)

Assemblywoman Nancy F. Munoz (R-Morris, Somerset and Union) touched on this topic — and another key issue — at an early committee meeting to discuss the bill, when she voiced her concern that the savings used to determine the rate of return for investors would be difficult to measure.

But even it the savings can be calculated effectively, what rate of return will be guaranteed to investors?

Most troubling of all, however, what happens if there are no savings? Presumably, the state would be on the hook for the entire amount, which raises another question: How much risk would the state be carrying in guaranteeing loans if the proposed savings don’t materialize?

Dealing with the Government

Under the bill, a private lender would reach an agreement with a government agency — such as the state Department of Health — to fund a nonprofit that would provide healthcare intervention services that would otherwise not be possible.

For example, private lenders could fund early intervention for asthma patients, so they receive appropriate treatment before they have a medical emergency and have to go to the emergency room.

The bill allows the state Economic Development Authority — which oversees the state’s business incentive programs — to guarantee up to $15 million in private loans over five years. The lenders would likely include foundations using their investment funds to bankroll a service provider.

If the program works as it’s intended, the state would benefit by being able to offer healthcare interventions that would improve residents’ health but would be difficult or impossible to fund without private capital.

The bill is based on programs launched in the United Kingdom and California that encourage private investment in social programs that the government can’t afford to fund. It passed 57-18 on March 21 with bipartisan support: 46 Democrats and 11 Republicans voted in favor. All 18 votes opposing the measure were cast by Republicans.

Bill sponsor Assemblyman Angel Fuentes (D-Camden) said the bill could fund early intervention programs for patients who have chronic illnesses that would allow them to be treated before they make repeated and expensive visits to emergency departments. Fuentes works with many such patients in his job as a patient relations representative with Cooper Health System.

“This is a terrible cycle, but we can change it ,” Fuentes said during a February meeting of patients who visit hospitals frequently. “With bipartisan support we can, I daresay, revolutionize it.”

The program is described in the bill as a pilot, which if successful could be expanded to serve other social programs, such as housing for the homeless and reducing recidivism by ex-prisoners.

Creating Incentives

Michael Clark, who recently received a graduate degree in government from the University of Pennsylvania and who worked with Fuentes in writing the bill, said at an earlier hearing on the bill that it is a unique way to create incentives for private investment to address intractable social problems while saving taxpayers money.

Clark described work being done by the nonprofit Collective Health in Fresno, Calif., as a model for New Jersey.

Collective Health has received funds from a private endowment to work with 1,100 asthma patients to reduce their healthcare costs through early intervention services. While the New Jersey bill is inspired by the California program, the California government isn’t guaranteeing that the endowment will be paid. Rather, the endowment is hoping that Collective Health reduces overall healthcare costs and thus inspires government bodies to launch similar programs. The California program is still in its early stages.

Clark noted that other EDA incentive programs focus on real estate investment, but this program is designed to promote investment in social programs.

“This would put a really sharp tool in that tool box” of incentives, Clark said.

If enacted, the bill would launch a commission that would study the effectiveness of the program in New Jersey, as well as assist the authority in soliciting donations and help negotiate the agreements.

The Maximum Wage

Assembly Reed Gusciora (D-Hunterdon and Mercer) expressed frustration that the bill didn’t limit the compensation of executives of nonprofits that participate in the program.

Both Gusciora and Munoz ultimately voted in favor of the bill.

Sidney Hargro, executive director of the Community Foundation of South Jersey, said his organization would be interested in using its investments to fund programs under the bill.

“I believe the future of philanthropy is an expanded tent that not only includes conventional grants but also innovative tools of change,” such as the social innovation loan program, Hargro said.

The nonprofit Office of Legislative Services couldn’t estimate the fiscal impact of the program, since the savings are unclear. The EDA may be responsible for the full $15 million.

The bill hasn’t been introduced in the Senate.