Pay for Success is a type of funding mechanism whereby a private organization provides a service which the government pays for only if certain outcomes are met. Traditionally, the payment to the private organization covers the costs of providing the service, plus a portion of the money the government saved because the intervention was a success. This way, the government only pays for a service if it is successful.
Oftentimes, a third-party funder is included in the contract, which we then call “social impact financing.” When there is a third-party funder, the funder puts up the money upfront for the private organization to provide the service. Then, the government pays the third-party funder if the service is successful.
There are only a few established Pay for Success initiatives serving children at the moment, including Chicago’s Child-Parent Center Initiative , Utah’s High Quality Preschool Initiative , and the Partnering for Family Success Program in Ohio.
There are many moving pieces in a Pay for Success project. There are multiple parties and these parties must establish complex contracts including details such as the desired outcomes, how success will be measured, how payment is structured based on reaching the predetermined targets, and what independent organization will conduct the evaluation. In early childhood, possible outcomes include less need for special education services, higher education attainment, or kindergarten readiness. These could be measured by number of active IEPs, high school graduation rates, and kindergarten assessment scores, among many others.
In order to begin using this mechanism more widely in the early childhood field, the Office of Early Learning at the Department of Education has launched the Preschool PFS Feasibility Pilot. This grant opportunity will fund “the development of feasibility studies to test the viability of using pay for success as a way to pay for preschool services.” Government agencies involved in the feasibility pilot will explore potential outcomes, measures, payment equations, and payment agreements between relevant parties.