California City Issues First Health Impact Bond

Can issuing a bond on a specific health care issue help tackle that problem?

The California city of Fresno is the first city in the US to test a  "Health Impact Bond" – to see if they can deploy the financial markets to invest in the health of their community.

This test bond focuses on the city’s skyrocketing chronic asthma rate; 20% of residents have asthma compared to 8% nationwide, costing $87 million a year.

First, they calculate how much the problem costs the government; the "pay for performance" bond then rewards investors as improvements are achieved.

The nonprofit California Endowment is backing this first bond with a $1.1 million investment to demonstrate potential savings to insurers – fewer visits to doctors and hospitals, and lower costs for employers.

"We are aware that governmental funding for worthy health projects is becoming increasingly difficult to obtain," writes the endowment in a white paper about the project. "Even when such funds are available, it is difficult to assure continued funding over a long enough period of time to effect sustainability of these efforts. Investment funding is a creative way to deal with both of these problems."

Nonprofit Collective Health and Fresno’s Clinica Sierra Vista will work with 1,100 low-income asthma patients for a year, encouraging them to make changes in their homes and in their behavior that could improve their health and reduce the occurrence of asthma attacks.

They set a target to reduce emergency visits 30-40% per person per year, saving over $5,000 per patient.  

That success rate would save California insurers close to $6 million in service costs related to asthma – including up to $3 million for the state healthcare assistance plan, Medi-Cal, in the form of reduced medical claims, estimates the endowment. 

If the Fresno initiative is successful, it would create a model for insurers to use, enabling them to both reduce costs and have a new financial vehicle to offer investors. 

With President Obama’s Affordable Care Act about to come into force, insurers will be looking for new ways to invest profits, because the legislation limits the amount of profits they can distribute to shareholders.

"The money will be used to reduce the expense associated with the care of their patients and in turn make more money," Kevin Hamilton, deputy chief of programs at Clinica Sierra Vista, told Reuters. "Not only that, they will likely get to write this money off because it is going to a bond with social impact while still making money for their shareholders."

Of course, insurers want to see if this model will work. "The biggest hurdle is that we need to prove there are real savings to be made," Rick Brush, founder and chief executive of Collective Health, told Reuters.

Health impact bonds would also be advantageous to employers. Whirlpool, for example, told Reuters they could provide "all the gain and none of the risk," and they’re even considering such a bond for employees.

New York City issued its first social impact bond this summer – Goldman Sachs put up $9.6 million to reduce the rate of inmate recidivism at Riker’s Island prison. New York state, Massachusetts, Connecticut and counties in Ohio and Los Angeles are also considering social impact bond issues.

"Capital is agnostic; if you promise them a return, particularly now when there aren’t a lot of great investment opportunities, they will come in," Anthony Iton, Senior Vice President at The California Endowment, told Reuters.

For more about Fresno’s social impact bond experiment: