Len M. Nichols
George Mason University
Lauren A. Taylor
Harvard University

A new way of solving an old problem: underinvestment in social determinants of health

September 25, 2018 - 10:22am

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 Group. Though 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.

Social determinants of health (SDoH), such as housing, transportation, food, economic security, education, social supports, and physical environments, are typically funded through an array of government and philanthropic programs and therefore are potential candidates for braided and blended funding streams at the community level. As readers of this blog series know, there is a large and growing literature documenting the many positive impacts of these services, but most communities have been unable to secure adequate funding and appropriate scale. What is particularly complex about this literature is that the same intervention, such as non-emergency transportation, can have different impacts on different communities and sub-populations.

In a recent Health Affairs paper, we apply an economic lens to the problem of underinvestment in social determinants of health, which yields the insight that social determinants like affordable housing, good jobs, and quality education can usefully be thought of as public goods, wherein exclusion of non-payers is difficult and benefits can be enjoyed without reducing availability for others. These properties give rise to well-known free-rider problems, which prevent these goods from being supplied at appropriate scale by traditional market forces. Historically, new government taxation and spending was perceived as the only solution to free-rider situations capable of having a scale beyond what private charity might support. Our current politics, however, make large increases in government spending unlikely.

Fortunately, a lesser-known branch of economics has also taught us that, under certain circumstances, public goods can be provided without undue reliance on government. These solutions come from the literatures on auction theory and two-part pricing models. We think the conditions for success are likely to be present in many communities that have been trying to address SDoH issues for some time.

A new model for collaborative investment

The promising financing model is called Vickrey-Clarke-Groves (VCG). For the model to work, local stakeholders must trust a “broker” enough to reveal – to the trusted broker alone – how much they value a solution to the SDoH deficit in their community. For our purposes, stakeholders include anyone who could stand to benefit from improvements in local SDOH conditions, including most notably health systems and insurers. The trusted broker could be a local philanthropy or non-profit organization, and it must be chosen by the stakeholders. 

The beauty of the model is that stakeholders gain the most when they reveal their value of solving the SDoH problem to the trusted broker alone. They would sacrifice their potential gain if they strategically lie about their true willingness to pay. In other words, being truthful is actually in their self-interest, unlike the traditional free-rider situation, where no one volunteers to pay anything. The mechanics of the model guarantee that stakeholders will pay no more than and likely less than they bid, which economists view as their willingness to pay. These features of the model make it more likely to be sustainable since financing is consistent with self-interest.  

Implementing a VCG model does require a substantial community-wide process: assembling the right stakeholder group, sharing information about local SDoH deficits, having the group choose a trusted broker, projecting return on investments (ROI) for possible interventions, selecting an intervention, conducting the bidding process and assigning prices, contracting with a vendor to implement the intervention, reconciling results, and facilitating bidding and price assignment for the second round. This process will draw upon, test, and possibly expand existing levels of trust in the community and will be time-intensive for all concerned.

This requirement for stakeholders to “buy in” to a local process as well as the information requirements for ROI calculations make the VCG model a closely-related idea to pay for success (PFS) and social impact bond arrangements. We view our model as an additional option for communities seeking a solution to the “wrong pockets” problem. 

Considering Vickrey-Clarke-Groves vs. pay for success

The fundamental differences between VCG and PFS are in which parties bear performance risk and how that risk is financed. In places where insufficient trust exists, PFS may be the only way to get an appropriate scale of intervention, at least until local data and experience demonstrate to all the positive ROI that the risk-bearing investor knows is possible. The advantage of our VCG approach is that the scale of the intervention would be determined by local stakeholders’ willingness to pay and no “outside” financial intermediary is required.

No mechanism is perfectly suited for every locale, but conversations are beginning in many places about the best approach for greater investments in addressing SDoH—a sign of progress. It is easy to be overwhelmed by the scale and complexity of SDoH deficits but our VCG model, much like the PFS literature generally, offers communities a means to improve health outcomes and restrain health care costs on their own terms.

For more detail on how the economics of the VCG model work and how communities can make it work for them, see our open-access paper here

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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.