How private sector tools can enhance governmental cooperation

In many areas of domestic policy, effective solutions to a problem typically need the coordination of different government programs and agencies. For instance, achieving good health in a community requires not just good medical care, but also attention to transportation, housing conditions and other “social determinants” of health.

The Obstacles to Coordination. Collaboration and coordination across agencies and programs is no easy matter at any level of government. For one thing, programs typically arise in different agencies under different laws drafted by different legislative committees. Related programs often end up with different eligibility rules, data systems and reporting requirements, making coordination hard. Agency budgets and policy goals are also typically siloed, with managers focused on their own departments’ budgets and goals, not on the larger picture.

Siloed budgets and management also contributes to the “wrong pockets” problem. This problem occurs when one agency is best placed to make an investment (such as a city housing agency building safe apartment for frail seniors), but another agency – another pocket –reaps the savings from that investment (in this case the Medicare and Medicaid programs, thanks to a reduction in costly falls). The wrong pockets problem is a feature of “public goods,” where many people or agencies – referred to as “free riders” – can enjoy the benefits of someone else’s spending without contributing their own dollars. As economists point out, if an investing agency is not able to capture much of the generated savings, and yet free riders would be able to benefit, there will be suboptimal investment; in other words, less total investment than would make cost-benefit sense for the whole community.

So how can government agencies tackle these problems? By using tools that economists and businesses are familiar with. Although government differs from business in many ways, government can and does benefit by adopting some private-sector techniques.

Special Product Teams. For example, large private firms routinely set up special product teams with the focused task of coordinating the work of various divisions to design, produce and market a new product. Different levels of government have increasingly been copying this business tool. For instance, back in 1987, Congress created an Interagency Council on the Homeless, an executive branch body designed to coordinate homelessness programs and funding within the federal government, and with lower tiers of government. Similarly, the Interagency Working Group on Youth Programs provides focus for youth-related programs in 21 federal agencies. Still, such federal-level bodies are less prevalent than they should be, and stronger White House and congressional leadership is needed to make them more common.

State Teams. States have generally made far more use of the product team model. For instance, more than half the states have now created “children’s cabinets.” These are made up of the heads of state agencies concerned with programs and budgets affecting children and youth, from health and education to corrections and social services; they engage in joint budget planning and service coordination.

Maryland has taken this approach further than most states. Since the mid-1990s, it has supplemented the state children’s cabinet with a network of county-level “local management boards” (LMBs), which analyze local needs and help coordinate public and even private funds to address those needs. The Anne Arundel County LMB (bordering Baltimore) “braids and blends” public funds from federal and state programs, as well as private money, to support local partnerships and cross-sector collaboration.

Pay for Success. When cross-sector efforts require significant capital to cover upfront costs and sustained spending for successes, funding can be even harder to organize and secure. Responding to this challenge, governments here and overseashave turned to the private capital market through so-called “pay for success” (PFS) or “social impact bond” (SIB) financing. This applies normal venture capitalism to the public sector.

In PFS, governments turn to private firms to provide funding, offering a projected stream of revenue to the firms accruing from future government savings. Importantly, it is the private entities that carry the financial risk; if the project is unsuccessful in generating the expected savings, the investors are not repaid.  In one example, New York City turned to Goldman Sachs to invest in an initiative to reduce recidivism among released Rikers Island inmates. In another Denver, Colorado, assembled funding from a range of private investors and foundations to finance housing and services for homeless individuals. Last year Congress allocated $100 million to help encourage SIB ventures.

Fixing Wrong Pockets.

At the leading edge of these private sector-inspired efforts to encourage collaboration are intriguing proposals aimed at overcoming the perverse incentives and underinvestment associated with the wrong pockets problem. And just as in the early days of SIBs, economists are developing and testing innovative tools. In one intriguing example, health economists Len Nichols and Lauren Taylor are seeking to apply an economic model called the Vickrey-Clarke-Groves mechanism, originally designed to address public goods and free rider problems, to the challenge of optimizing investments in social determinants of health.

In a nutshell, the idea is to create a form of auction, run by a trusted intermediary body. In this auction, institutional stakeholders in a proposed new collaboration – such as health plans, housing agencies, social service department etc. – would each offer financial contributions, or bids, in return for a share of the total expected savings from the proposed collaboration. A well-structure auction would overcome the wrong pockets problem, and optimize the total investment, by assuring that every stakeholder’s benefits exceeded their contribution. In a simple example, a state Medicaid program might offer to compensate a housing agency for even more than the cost of making bathrooms safer for the low-income elderly if Medicaid’s expected medical savings were large enough.

There is much wrong with the procedures we use in this country to organize programs and agency responsibilities to tackle complex problems, and many structural changes are needed in those procedures. However, by adopting some tools from private sector, governments are helping more cross-sector, cross-agency collaboration to happen.