PFS Is a Mechanism for Contracting for Social Outcomes

PFS is a program funding mechanism that some U.S. state and local and  foreign governments are using to contract for prevention services to  address entrenched social problems. The first PFS project began in the  United Kingdom in 2010. These payments are, in theory, based on the  savings that result from decreased use of government services. If the program is successful, the government  obtains improved outcomes for vulnerable populations. In addition, PFS  can potentially capture cost savings by reducing the need to provide  costly remediation services to the individuals in vulnerable populations. They provide capital on  the condition that the government will repay the investment if outcomes  are achieved, usually with a rate of return. PFS Projects Were Structured in a Variety of Ways and Sought to Achieve Potential Benefits, Such as Improved Social Outcomes and Cost Savings

		PFS Projects Were Structured to Implement Prevention Programs to Address Entrenched Social Problems

In our selected case illustrations, governments used PFS to address  entrenched social problems. Participating Organizations Sought to Manage Risks in the Feasibility Assessment, Design, and Implementation Phases of Complex PFS Contracts

		Governments, Service Providers, and Investors Recognize that PFS Projects Present Risk

PFS is predicated on the idea that governments shift the risk associated  with developing and implementing a prevention program to investors. As a result of the perverse incentive to focus on those that are easiest  to serve, those that are most in need and most difficult to serve could  receive fewer services or a diminished focus. For example, the  New York project included performance measures on both reducing  recidivism and increasing employment for individuals who were recently  released from prison. Stakeholders said that evaluations can manage potential perverse  incentives, such as creaming. The Federal Government Could Play a Role in Funding, Building Capacity for, and Managing Investor Risk in PFS, but a Formal Mechanism to Collaborate and Share Lessons Learned Does Not Exist

		The Federal Government Could Play Several Roles to Address PFS Challenges at the State and Local Level

While the effectiveness of the PFS model remains to be seen,  stakeholders cited three potential roles the federal government could play  to help address challenges at the state and local levels of government  and further develop the PFS field: providing outcome payments, building  capacity, and providing loan guarantees. There Is No Formal Mechanism for Federal Agencies to Collaborate on PFS

In our prior work, we stated that collaborative mechanisms, such as  interagency groups or collaboration technology, can be used to develop  policies, implement programs, and share information. Officials from one federal agency said that  information about the various roles that federal agencies have played in  the PFS field would be informative, given that the approach to supporting  PFS has varied by agency. Recommendation for Executive Action

To identify and broadly disseminate information on leading practices and  lessons learned, the Director of OMB should establish a formal means for  federal agencies to collaborate on PFS. The Office of Management and Budget (OMB) provided written comments  concurring with our recommendation and is working with agencies to  explore options for continued collaboration on Pay for Success. We examined (1) how selected PFS  projects have been structured and what potential benefits these projects  can provide; (2) how selected PFS contracts have been structured to  address potential project risks; and (3) the potential roles for the federal  government’s involvement in PFS projects. Through this review, we identified eight  federal agencies that were involved in an informal working group and  played different roles vis-à-vis PFS.
Why GAO Did This Study

Federal, state, and local agencies play an important role in improving social outcomes for society's most vulnerable populations. A small number of state, local, and foreign governments are employing PFS to fund efforts designed to better serve these vulnerable populations.
GAO was asked to provide information about PFS. This report examines (1) how selected PFS projects have been structured and what potential benefits these projects can provide; (2) how selected PFS contracts have been structured to address potential project risks; and (3) the potential roles for the federal government's involvement in PFS projects.
To address these objectives, GAO reviewed relevant literature on PFS; selected 10 PFS projects that reflected a variety of policy areas and were in different stages of implementation in state and local governments in the United States and the United Kingdom, where PFS originated; reviewed key documents and interviewed stakeholders from organizations that played a role in the selected projects; and reviewed documents and interviewed officials from the eight federal agencies that participated in an informal PFS working group.

What GAO Found

Pay for Success (PFS), also known as Social Impact Bonds, is a new contracting mechanism to fund prevention programs, where investors provide capital to implement a social service— for example, to reduce recidivism by former prisoners. If the service provider achieves agreed upon outcomes, the government pays the investor, usually with a rate of return, based on savings from decreased use of more costly remedial services, such as incarceration. Stakeholders from the 10 PFS projects in GAO's study said that PFS offers potential benefits to all parties in the project. For example, governments can implement prevention programs that potentially lead to reduced spending on social services and transfer the risk of failing to achieve outcomes to investors.
The PFS projects in GAO's review sought to manage potential risks in the feasibility assessment, design, and implementation of complex PFS contracts. For example, without safeguards, there is a risk that paying for outcomes could create perverse incentives, such as focusing on individuals who are easiest to serve rather than those most in need. To address this risk, PFS contracts included various provisions, such as only including those with the greatest need in the evaluation that determines if the government makes payments.
To date, federal government involvement in PFS has been limited. The Office of Management and Budget (OMB) has encouraged agencies to explore the use of PFS as appropriate. Potential roles federal agencies could play in PFS projects include making outcome payments or helping build capacity. We have previously reported that collaborative mechanisms, such as interagency groups, can be used to implement programs and share information. However, a formal mechanism for federal agencies to collaborate on PFS does not exist. Given the evolving nature of PFS, a mechanism for federal agencies to collaborate on PFS would increase access to leading practices.

What GAO Recommends

To identify and broadly disseminate information on leading practices and lessons learned, the Director of OMB should establish a formal means for federal agencies to collaborate on PFS. OMB concurred with this recommendation and is working with agencies to explore options for collaboration.