Social Outcomes Contracting

Social outcomes contracting (SOC), also known as outcome funds, is a novel mechanism for investment in health promoting services. SOCs are contracts in which payments are made only when pre-agreed social (or health-promoting) outcomes are achieved by the funded programme or organisation.

 

SOCs are different to a ‘payment-by-outputs’ approach and social impact bonds (SIBs). The most significant difference is the inclusion of the investor in the development stage. SOCs help participating organisations to align their incentives to achieve social outcomes, while also saving public expenditure due to their focus on prevention and generating return on investment.

 

The benefits of an outcome-based contract model come forth from its approach to public-service management that seeks to improve value and impact. Payment mechanisms can differ, as arrangements can include a proportion of upfront or activity-based payment that is not contingent on the achievement of a specified outcome. Some form of upfront payment or ‘fee-for-service’ has the potential to make the scheme more attractive to providers and investors. This is because the fee can be used to help start-up costs and reduces the risk they take on in agreeing to the contract.

 

For an example of how social outcome contracting is used in Sweden to decrease sick leave and build health-promoting workplaces, watch this video and read the case study below.

Case study

In Sweden, a social outcomes contract project for a preventive and healthy workplace was developed in response to an increase in sick leave across the country. The costs of sick leave benefits had risen from 26.2 billion Swedish Krona in 2013 to 39.8 billion Swedish Krona in 2016 (+52%), a trend particularly noticeable in the workplaces of public regions and municipalities, compared to private employers. Increased sick leave imposed a high burden on these public employers, as they are responsible for covering the expenses of short-term sickness (1-14 days). In addition, a rise in sick leave increased indirect costs and negative effects, including productivity loss and lower quality in public services.

 

A pre-study conducted in Swedish municipalities, in collaboration between SALAR, RISE, the European Investment Bank and Kommuninvest, found that 20% of employees accounted for 75% of the costs of short-term sick leave. The identified risk group of employees were found to be absent on 3 or more occasions during a 12-month period. The pre-study further indicated that regions and municipalities did not put enough effort into early identification and intervention in terms of reducing sick leave and improving employee health.

 

The intervention

The project employs a multi-level approach to target both individual and organisational factors impacting occupational health. The health support enables early identification of ill-health and sick leave absence which, in combination with structural interventions (manager support), enables preventive and health promoting actions. Additionally, the interventions aim to generate long-term competence at the human relations department in terms of identification and implementation of preventive actions – thus establishing capacity for prevention in a broader perspective.

 

The structure of the SOC enables performance management and programme improvement, as well as collaboration between private and public sector organisations. The occupational health service provider is procured and contracted by the local authorities to perform services (health support and identification of risk groups). The public sector has played a big part in implementing the SOC, compared to other countries where SIBs have been adopted. Although the actors involved in a SOC or SIB may vary, the investors often include private actors. For instance, in the occupational health SOC in Botkyrka and Örnsköldsvik, the project is solely financed by the local authorities themselves, making it a unique example of a publicly-financed SOC. The project management organisation, consisting of a new entity formed by state-owned RISE and SALAR, assists with project monitoring, evaluation and support during the implementation process.

 

Financing specifics

The contractual partners in the SOC are the finance and human resources departments of the local authorities, as well as the intermediary organisation (RISE and SALAR). The total investments in the SOCs of two municipalities are 17,4 million Swedish Krona and 22,870 million Swedish Krona, respectively (€4 million in total) over a three-year period.

 

A financial instrument referred to as Sustainability Bond with Impact-Linked Return (SBIR) was designed to allow for institutional investors and a large investment volume (€100 million). The SBIR combines a loan (approx. 90%) with a social outcomes contract (approx. 10%) in order to achieve enough investment volume and a suitable risk profile. However, the Swedish local authorities decided to finance the SOC on their own.

 

During the procurement process of external service providers, various parameters were considered, including proposed risk-share agreements. The service providers were offered to bid on risk appetite - between 25% and 75% of reimbursement to be dependent upon the outcomes of the SOC. The contracted providers bid for 50% and 75% in each municipality. The financial commitments between the investors and service provider is regulated with a pay-for-performance contract based on this financial risk sharing with a potential premium for over-performing ,which is capped at half the risk level. Thus, there is financial risk sharing between the municipalities and the service providers.

 

Based on international experience, various case scenarios were outlined, defining the financial outcomes for all parties. All scenarios include a total intervention period of 36 months and a 9-month ramp-up to full intervention effect. Aiming for the low case scenario (12%) average reduction in net sick leave days will result in a break-even point. The expected base case scenario is on average 18% reduction, and the best case is 34% reduction of net short-term sick leave days. The estimated likelihood for achieving at least base case is 80%.

 

Measuring outcomes

As the results of health promoting interventions tend to only be observable years after the initial investments are made, it was challenging to identify long-term financing opportunities for a project aiming to prevent sick leave, particularly due to annual budget cycles.

 

The main outcome measurement used for financial evaluation is the direct costs for reduction in net short-term sick leave days (1-14 days), adjusted for national trends in sick leave. Other outcomes measured are long term sick leave (15+ days), purchasing of occupational health care services and size of risk group.

 

The share of repayment is dependent upon the financial risk of the service providers, but the cash flow also depends on the estimated cost for the service delivery per employee, the number of employees at the baseline measurement and the outcomes achieved. Evaluation is done by calculating the trend adjusted change of net sick leave days compared to the historic baseline. Reductions beyond break-even will result in repayments to the local authorities (66.25% and 81.6%) and to the service providers (33.75% and 18.4%). The cap on payments to the providers means that reductions above 150% of the investment value will go solely to the local authorities.

 

Click here for the full case study.