Can Homelessness Programs Make Money -- and Should They?
"Pay for success" is changing the way cities confront the problem.
For most of his career, Sander Schultz has observed a frustrating disconnect between what emergency responders expect to do on the job, and what they actually do. “You get into this business to help people,” says Schultz, who coordinates emergency medical services (EMS) in the small coastal city of Gloucester, Mass. Most of the people his crew picks up are familiar faces who experience repeated crises related to addiction or mental illness, or both. “They’re not bleeding or waving a gun around or on fire.”
The common thread most of this population shares? They’re homeless. Until recently, people in Schultz’ position faced a frustrating reality. They could stabilize the person temporarily, but they couldn’t provide permanent solutions. “Treating frequent flyers and the behavioral health of this population is incredibly fatiguing on police, fire and EMS,” he says.
But around 2014, a local nonprofit joined a statewide experiment to use public rental vouchers and Medicaid dollars to house and treat long-term homeless individuals in the city. The initiative was a “housing first” approach, meaning that people didn’t need to be sober or meet other common preconditions before moving in. Tenants would be assigned a caseworker to help them address whatever led them to homelessness in the first place. The services, which would be tailored to the individual’s needs, could mean everything from literacy classes to job training to addiction counseling.
The experiment is ongoing, but it’s already had a positive impact on emergency responders, Schultz says. It’s not that EMS personnel have stopped encountering people with behavioral health challenges. “It’s that you don’t have the same one for seven years running,” he says. “Once somebody comes onto the radar and becomes an issue, we deal with them. We target them for services that take them out of that frequent-flyer category.”
What’s happening in Gloucester is happening in cities all over Massachusetts, as part of a concerted statewide effort to house up to 800 individuals who had been chronically homeless and keep most of them housed for six years. As in Gloucester, the goal is to provide low-barrier access to housing and a network of health, social and employment services.
It’s an ambitious initiative that puts Massachusetts among the leading states in terms of addressing chronic homelessness. But there’s something else that makes this program unique: If everything goes according to plan, some investors stand to make a profit from it.
That’s because the program uses a funding mechanism known as “pay for success,” a type of performance-based contracting in which private investors pay the upfront costs of a social program, reducing the risk of experimentation for government. Under the arrangement, the investors stand to recoup their costs, and possibly profit, from positive social outcomes. If the program doesn’t work, the government avoids a major financial loss for trying something new.
Pay for success programs have been around for nearly a decade now, and they’ve been lauded as a new silver bullet for intractable policy issues. The field started in earnest in 2010 with a criminal justice project in the United Kingdom. The early initiatives went by another name -- social impact bonds -- even though they didn’t actually involve bonds and could fall short of making an impact. In fact, the first U.S.-based social impact bond, which tried to reduce recidivism among incarcerated youth at Rikers Island jail in New York, came to a premature end after evaluators found that it wasn’t working. Another project, which sought to reduce the need for special education among at-risk kindergartners in Salt Lake County, Utah, claimed to produce positive results, but independent early education experts questioned the project’s improbable numbers and flawed study design. For all the buzz around pay for success projects, they had a rocky early rollout in the U.S.
But the Massachusetts project might be different. It was the first state or local government effort in the United States ever to apply the pay for success funding mechanism to a housing program. And that could represent a turning point. The actual on-the-ground tenets of the initiative aren’t new. “Housing first” and “supportive housing” have been mantras of many homeless advocates for more than a decade. Instead of trying to demonstrate efficacy, the project is exploring questions of scale and cost. Can the approach that currently exists in pockets of Massachusetts be implemented across the commonwealth, and will it save money?
Private investors -- a bank, a local United Way and a national housing nonprofit -- provided $3.5 million in upfront investment to test the model. Depending on how many people retain their housing for at least 12 months, those investors could get back anywhere from 0 to 100 percent of the money they put in, plus interest. The project’s backers bet that stable housing would reduce the strain on other public services, such as visits to jails and emergency rooms, and ultimately save taxpayers some money. Since Massachusetts introduced its program, a growing number of places have started their own version of housing the homeless, each slightly different but premised on the same basic concept that if governments can put homeless individuals into permanent housing, social benefits and cost reductions will follow.
It’s too early to know if all the projects will succeed, but the results in Massachusetts are encouraging. Out of 678 individuals who’ve been housed, 92 percent remain in their unit or had a “positive exit,” such as moving into another apartment. Preliminary data from the project’s first year showed a dramatic drop in tenants’ use of services from the six months before getting housed and the six months afterward. The group as a whole spent fewer days in jail, in hospitals, in detox and in emergency shelters. Ambulances picked them up on fewer occasions, too. In a cost-benefit analysis, the Massachusetts Housing and Shelter Alliance -- the housing provider for the project -- found that the reduced use of those public services resulted in a net benefit of $2.2 million.
Massachusetts isn’t the only place reporting promising results after combining a housing-first model with psychosocial support services for tenants. In Santa Clara County, Calif., which is also running a pay for success project, about two-thirds of program participants -- who, by definition, had been chronically homeless and high users of hospitals and other public systems -- have stayed housed for at least two years and are now contributing about 30 percent of their income to rent. In Denver, another pay for success site, nearly every person who could have retained housing for the first six months of the project did so. Perhaps it’s no surprise that at least six pay for success projects focused on housing the homeless have come online since 2014.
Yet the early positive results and the excitement they’ve generated have also sparked some pushback that housing programs aren’t money savers in the long run, and shouldn’t be. And if that’s true, it raises related questions about what the goal of a pay for success project ought to be -- to reduce public spending or to raise social impact? Regardless of whether the housing programs lead to lower health-care and criminal justice costs, the early data suggests that they keep people housed, an achievement in itself. In that respect, social policy experts are already studying projects like Massachusetts’ to understand what makes it more effective than initiatives that use the same financing mechanisms for other populations, such as preschoolers and incarcerated youth.
The fact that housing the homeless has become a focus for so many early pay for success projects is no coincidence, says Fraser Nelson, a managing director at the Sorenson Impact Center, a think tank in Utah. Before joining the center, Nelson worked for the Salt Lake County Mayor’s Office, where she led pay for success projects on housing, criminal justice and early childhood education. “If you’re a mayor of a county or a city and you’re looking at where the big pressure points are in your budget, you’re likely to stumble upon behavioral health, homelessness and the criminal justice system,” Nelson says. “Pay for success is a financing tool that allows jurisdictions to look at areas in the budget where they’re spending a lot of money but not necessarily getting the outcomes they want.”
Compared to other policy ideas being tested by pay for success projects, the combination of housing first and supportive housing already has a relatively large body of evidence that suggest they work, particularly for people who’ve been on the streets or in shelters for a long time. “You’re talking about a program that has been tested in multiple places, has demonstrated results in a lot of places and is something that has proven to be pretty replicable,” says Justin Milner, a senior fellow at the Urban Institute who studies pay for success projects. “You can’t say that for a lot of other social programs.”
In many ways, housing is an ideal fit for pay for success financing, Milner says. The arrangements require coordination between banks, nonprofits and government, a connection that’s already common in the housing industry. They also demand timely data to track services and outcomes, which can be challenging if investment in one policy area -- early childhood education, for example -- is supposed to produce results in another policy area, such as public safety or employment. But most state and local governments know who receives housing assistance. “It is both an output in that you’re providing a service, and the service is housing,” Milner says. “But it’s the outcome that you care about, too, because the stable housing can be a platform for making sure that individuals are not ending up in jail or emergency rooms.”
The timeframe of housing programs also dovetails well with the goals of pay for success projects, which tend to require some proof of impact within a few years. And for public officials who back these financial arrangements, it’s helpful to have some encouraging results to report by the next election. By comparison, services that seek to change the long-term trajectory of a young person’s life might have equal merit, but would face challenges in producing meaningful results within a matter of years.
For all the upside of using pay for success financing for housing, some homelessness experts worry the projects are being marketed too much as money savers. Even in cases where housing fails to produce net savings, “it doesn’t mean housing isn’t a critical need or isn’t something that you should do,” says Barbara DiPietro, senior director of policy for the National Health Care for the Homeless Council. “From our perspective, the pay for success model is still based on financial return on investment. We’d like to see more of a moral justification.”
Two years ago, a group of physicians wrote an article in the New England Journal of Medicine arguing that proponents of housing-first projects were actually overpromising the financial benefits. They noted that most of the demonstrations linking cost savings with a housing-first intervention used weak study designs. In general, evaluators took snapshots of what happened to homeless people before and after they received housing and other help. It was hard to say whether reduced demand for emergency services was due to housing, or some other factor that coincided with the time people received help. For those who became homeless due to a temporary crisis, stable housing and a reduced need of public services were part and parcel of people getting back to their normal lives, something statisticians call a “regression to the mean.” More sophisticated experiments that provided the housing and support services at random, and compared results against a similar control group that did not receive the same assistance, did not find that housing first resulted in net savings. The authors still advocated for using a housing-first approach, but cautioned proponents to take a more nuanced view of its benefits.
“I’ve been getting the same criticism for a decade,” says Joe Finn, president and executive director of the Massachusetts Housing and Shelter Alliance. His organization pioneered a small-scale precursor to the commonwealth’s pay for success project in 2006, which inspired the statewide experiment happening today. He’s familiar with the concern that a strict before-and-after snapshot doesn’t prove causality or effectiveness. “This idea of ‘controls’ and ‘regression to the mean’ -- they’ll dole out all of this stuff to say, ‘You haven’t demonstrated anything.’ Well, I disagree.” Last year, he coauthored a journal article showing a 64 percent reduction in spending on emergency services six months after participants received housing. Even after accounting for the housing program’s costs, net spending was down 36 percent.
“Wouldn’t it be great if legislators and people who allocate budget resources were able to grasp the moral and ethical value of housing the mentally ill who walk our streets? But the truth of the matter is that they don’t,” Finn says. In the context of all of the other competing priorities in a state budget, “there has to be some sense on their part that what they’re investing in has some sort of return on investment,” he says.
Ultimately, some of the pay for success projects may indeed show cost savings, says Mary Cunningham, a housing expert at the Urban Institute. It will likely depend on who is being targeted, how severe their needs are, how intensive their current services are, and whether they were previously a strain on expensive emergency services. For all that researchers currently know about the housing-first model, they’re still waiting to see whether programs like the ones in Santa Clara County, Denver and Massachusetts reduce health-care costs years down the road.
What the projects are more likely to yield is cost offsets, Cunningham says. In other words, savings gleaned from reduced use of emergency services might make a housing program less expensive, even if the financial benefits don’t exceed the net costs. From the standpoint of improving people’s health and well-being, governments may decide that a housing program with cost offsets, not cost savings, is still worth doing. “People who’ve been living on the streets for long periods, they have some cumulative health issues that come from just a lifetime of disadvantage,” Cunningham says. “As you’re decreasing your emergency care, you’re also ostensibly upping your preventative and primary care. They may not be winding up in the emergency room for hypothermia or alcohol poisoning, but they may be addressing long-term issues like diabetes. When you stabilize them in housing, part of the goal is to help them address some of those issues, and that does cost money. That’s a good thing, though.”
Despite the uneven rollout of pay for success projects in the U.S., they’re here to stay. In February, Congress passed a law that sets up a $100 million standing fund at the U.S. Department of Treasury to reimburse projects that show financial savings for federal, state or local government. While the funding could go to more housing-first initiatives, the law allows a broad range of possible focus areas, from reducing teen pregnancies to increasing the employment of veterans.
Housing-first programs are here to stay, too -- even ones that don’t incorporate pay for success financing. Pulling together a pay for success project can be complicated, involving a lot of administrative overhead and significant time resources. If governments can move forward on housing-first projects without that funding element, they should, says Milner of the Urban Institute. In some cities, including Chicago, Orlando, Fla., and Portland, Ore., hospitals and health-care networks are donating millions of dollars to housing-first initiatives. “If you don’t have to go through the complexity and the rigors of a pay for success project to expand the service array and the housing units who can benefit from them, power to you,” he says.
In cases where governments don’t use formal pay for success arrangements, they may still borrow some of the outcome-based contracting structure, says Santa Clara County Supervisor Dave Cortese. After getting a monthly progress report on Santa Clara’s housing-the-homeless project, county officials now want to hold contractors accountable on an ongoing basis for other services, such as legal aid for undocumented immigrants. In the past, contractors would typically share results at the end of a multiyear grant cycle. “That’s not enough for us anymore,” Cortese says.
While the county will be keeping closer tabs on results, it isn’t as focused on lowering overall costs as it is on shifting those existing dollars to more effective solutions. In its pay for success project, the county hospital has seen a 55 percent reduction in emergency room visits and a 68 percent reduction in the use of emergency psychiatric services by formerly homeless tenants. Cortese says he’s okay with investing more in housing if it means less need for emergency health care. “We either pay now or pay later,” he says.
Santa Clara County’s emphasis on the health and social impacts of its housing pay for success project is part of a broader reevaluation of what governments and their outside investors want to achieve. “You’ve seen a shift in the conversation,” Milner says, “from a deep focus on cost savings to this broader sense of how can projects lead to better outcomes for vulnerable populations. Hopefully, cost savings are part of that, but we’re going to have to see.”