The Brookings Institution
Senior Fellow, Economic Studies
The Brookings Institution
Senior Research Assistant

An antidote to the “wrong pockets” problem?

October 8, 2018 - 2:48pm

This blog series “Uniting funding streams for health and social innovation” is a collaboration between the Urban Institute’s Pay for Success Initiative (PFSI) and The Brookings Institution-hosted Braiding and Blending Working GroupThough not every post is focused on pay for success, the working group and this blog series aligns with the PFSI mission of researching and supporting innovative financing solutions to today’s most pressing challenges. This series highlights the research of experts in healthcare financing focused on creative approaches.

Healthcare service providers spend a lot of money on physicians, drugs, and hospitals. As health care researchers and practitioners become increasingly aware that nonmedical factors, such as housing and social services, are key determinants of long-term health and lifespans, policymakers, philanthropy, providers and insurers could consider shifting the way they spend to improve health. Investing in non-medical preventative services that improve health outcomes would help avoid unnecessary medical care later in life, ensuring more efficient spending. For example, spending more money to make apartment bathrooms safer for seniors would avoid harmful and costly falls; addressing social conditions in many communities would avoid toxic stress and long-term mental health problems among children. However, redirecting funds can be challenging.

Wrong pockets disincentives

One of the biggest barriers to redirecting funds is the “wrong pockets” problem. This problem arises when one organization or sector is best placed to invest in achieving an outcome, but another sector or organization would benefit financially from the investment. That is why it is difficult to persuade a housing authority, a transportation system, or schools to spend money that would yield health care savings and improvements but would not enhance their own sector goals.

We could take several steps to help address this significant obstacle to redirecting funds that would improve health. Among them, budget process incentives designed to encourage more braiding and blending of funds seem likely to be the most effective. The key step is to revamp budgeting and payment rules to overcome the perverse wrong pocket incentives. With different rules, cross-sector investment becomes more feasible.

Better budget rules

One such rule change is to group multiple “pockets” together under the same part of the budget process by creating budgeting bodies dedicated to improving “health.” This is happening to a degree in other areas, such as supportive services for children: more than two-thirds of the states have created children’s cabinets, which are interagency state boards established to use pooled resources flexibly across sectors. Maryland has established similar boards at the county level.  Interagency health boards, with the bottom-line budget objective of enhancing health—no matter whether they spend on housing or family services, for instance—would help break down the wrong pockets problem.

Another promising budget rule change is to make greater use of private investment capital, rather than relying only on public investment. New federal budget rules, as well as many state initiatives, mean governments can raise the capital costs of innovative cross-sector approaches privately. This can be much easier than trying to organize funds from each agency. As the Urban Institute has explained in its work, so-called pay for success (PFS) models allow private capital to be used to reach a specific objective while ameliorating the wrong pockets problem—in this case, to achieve improved health.

Encouraging cross-sector investment

It is also important to provide incentives for health organizations to invest in other sectors that improve long-term health. Braiding and blending of this type fits neatly within the model of capitated managed care organizations. For instance, Medicaid managed care organizations (MCOs) receive a capitated payment to keep their enrollees healthy, which gives them more of a business incentive than under traditional fee-for-service reimbursement to spend funds on housing or any other sector that would improve the health of enrollees and reduce their medical costs.

Ohio-based CareSource is investing in such approaches to explore their impact. Its JobConnect program helps adult Medicaid members with a range of training, transportation, childcare and other services to help people obtain good jobs—based on the knowledge that stable employment is a significant contributor to improved mental and physical health.

For such initiatives to be fully tested as a business proposition – and often for organizations to even try them – federal and state rules must allow MCOs to use capitated payments flexibly and measure the long-term effects and costs. In the past, the rules have often made such blending and braiding difficult. Fortunately, the federal government has been easing the regulations, but we need to do more. Medicare Advantage plans—the private managed care plans in Medicare—also receive capitated payments and have an incentive to explore programs such as improved housing for seniors. In that area, federal rules and legislation are also beginning to make it easier for plans to invest in other sectors and reduce the wrong pockets problem.

In our work on social determinants of health, we find the wrong pockets problem getting in the way of many approaches that would significantly improve health and eliminate avoidable medical costs through investments and services in non-medical sectors. Creative forms of braiding and blending help to overcome the problem, either by changing the locus of budget decisions or granting more authority for health organizations to invest in other sectors.


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The views expressed in the series are those of the authors; as an organization, the Urban Institute does not take positions on issues. Experts are independent and empowered to share their evidence-based views and recommendations shaped by research. Photo via Shutterstock.