Pay For Success and Social Innovation Financing: Serving Santa Clara County’s Mentally Ill Residents

In 2016, Santa Clara County was launching a six-year project aimed at reducing the enormous costs of treating its most acute mental health care patients − $45 million a year − while improving their treatment and quality of life. For the project, the county chose a new model called “Pay for Success” (PFS), in which governments only pay service providers if their efforts are successful.  By contrast, in the traditional payment model, providers bill the government on a regular basis for activities and outputs, such as the number of hours spent counseling clients. To provide service providers with working capital during multi-year projects, Pay for Success programs may be paired with Social Innovation Financing, under which commercial investors, foundations and high net worth philanthropists fund the organization’s ongoing operations. They are then repaid to the extent that service providers meet their promised outcomes.

The PFS model was growing, with $200 million in play in 45 projects around the world. But its detractors raised questions about issues such as 1) using private funds for services for vulnerable people being served, 2) the high government transaction costs of the projects, and 3) potential incentives for service providers to game the system by cherry picking clients or providing inferior services to reduce government costs.

Santa Clara county was doing the first PFS project in the mental health care space, and had chosen the for-profit service provider Telecare. But many decisions still had to be made: How could the county attract Social Innovation Financing partners and negotiate a repayment structure that worked for all parties − while making sure that incentives and motivations were aligned? How should the county measure the success of this project? Which were the right metrics to assess – and which should be linked to payment?