INTRODUCTION
This Open Source Solutions paper•
analyzes asserted “legal
constraints to using federal Medicaid funds as an investor
payout source”1 for “social-impact investment”2 transactions
under the 2016 Medicaid Managed Care Final Rule (also referred
to as the Mega Reg).3
We explore how “value-based purchasing”
(VBP) under the Final Rule encourages Medicaid Managed Care
Organizations (MCOs) to increase spending on non-medical
interventions that target patient- and community-related social
factors and circumstances that are known as “social determinants
of health” (SDOH). We then compare two funding options, MCO
self-funding and outcomes-based, social-impact investment
mechanisms such as “Social Impacts Bonds” (SIBs) or “Pay for
Success” (PFS) contracts,4 with a particular focus on non-medical
needs that are most salient in Medicaid populations.

The views expressed in this Open Source Solutions paper are those
of its author(s) and may not reflect the views of the Federal
Reserve Bank of San Francisco or the Federal Reserve System.
This work was conducted as part of the University of Michigan
Policies for Action Research Hub, with funding from the Robert
Wood Johnson Foundation (award 73217).
1 Paula M. Lantz et al., “Pay for Success and Population Health:
Early Results from Eleven Projects Reveal Challenges and
Promise,” Health Affairs (35, no. 11; 2016): 2053-2061.
2 Impact investments are “made into companies, organizations,
and funds with the intention to generate social and
This analysis considers three specific questions. First, to
what extent does the Final Rule allow federal managedcare funding to pay for non-medical (primarily social)
services and interventions? Second, will future Medicaid
managed-care rates fall if prevention programs reduce
health care utilization and cost? And third, does the Final
Rule make SIB/PFS financing mechanisms—in which
private sector capital could be used to fund a non-medical
social intervention—more attractive than MCOs paying for
SDOH projects directly from their own funds?
Outcomes-based funding might help accelerate the adoption
of interventions that address social circumstances and other
non-medical factors to an extent that has so far eluded federal
and state efforts. Private investors would provide the up-front
funding for the expansion of prevention, early intervention,
and other social programs. In the case of interventions that
environmental impact alongside a financial return.” Global
Impact Investing Network, “What is impact investing?”
available at https://thegiin.org/impact-investing/need-toknow/#what-is-impact-investing.
3 Title 42, Public Health, of the Code of Federal Regulations
(CFR), Volume 4, Chapter 4, Part 438, 81 Fed. Reg. 27497
(hereinafter “§438”), available at https://www.gpo.gov/fdsys/
granule/FR-2016-05-06/2016-09581.
4 This paper uses the terms Social Impact Bond and Pay for
Success, and their respective acronyms, SIB and PFS,
interchangeably.
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