How ROI (and other analysis tools) can save our social programs

Medicare

Social benefits are on the chopping block—with the United States’s unsustainable deficit, cutbacks are almost guaranteed. But for many preventive programs, cuts will end up costing society more money in the long run. What if there were better tools policy makers could use to determine which programs were worth the investment now for a big payoff later?  

Every day, it seems, we’re faced with another difficult choice. Extend the payroll tax cut? Cut Medicare? Raise the monstrous debt ceiling—or default on bonds? These tough choices and budget woes are only likely to worsen, primarily because of the increased spending, especially for safety net programs like Medicaid and Medicare.

But instead of agreeing to additional taxes or major cost savings in “entitlements,” legislatures are whacking “discretionary” items out of their budgets—a portion of budgets that represents only about 30 percent of total spending.

Why? Because it’s a politically easier choice. For now.

But missing from the debate on how to balance budgets is a discussion of the consequences of chopping large amounts from these discretionary programs, such as early childhood education, higher education, training the unemployed for work, drug treatment, providing supportive housing, or repairing roads and bridges.

The best of these programs are preventive expenses for taxpayers that reduce future costs for low-income health care, child care, housing, and direct costs for incarceration. In many cases, these programs not only pay for themselves through savings, they provide a positive return on investment to government and to society.

So why are discretionary items so vulnerable, even though they add value? I believe it’s because we have a distorted view of “value.” Americans don’t like to cut back the programs they benefit directly from, such as Medicare and Social Security. A powerful alignment of interest groups lobby and promote these views.

In contrast, the government and non-profit interests that typically deliver discretionary services serve smaller, less well-financed, and more unseen populations.  And, they have not done a credible job of defending their claims of value—and helping all Americans understand how they benefit from these services.

Just like the private market, some providers of services are a better value than others. The problem is that there have been no mechanisms like those used in the marketplace to readily distinguish value (e.g., competitive pricing, earnings, or customer ratings). Each discretionary service provider uses its own approach to analyze value.

Some make outlandish claims, leaving legislators in disbelief, immune to any argument. Legislators simply can’t distinguish the best providers from the rest. Therefore, they give up and use a meat cleaver on every program instead of taking a scalpel to the underperformers.

We need government to accept a uniform approach to analyzing the impact of its investment in programming, just like we demand it in the investment world. Can you imagine choosing a stock or bond without having a generally-accepted financial analysis provided by objective evaluators? And how would businesses operate if they didn’t have a sound return analysis to use in making resource decisions?

Fortunately, the same analytical tools that work well in the business and investment worlds work equally well in the world of social spending: return on investment (ROI) and net present value (NPV). Both tools evaluate the return to the investor (government in this case) from a social program.

The critical first step is to agree on what the social outcome is to value. For example, in workforce training, there is general agreement that a participant’s wage increase and job retention are the key social determinants of evaluating program results.

These social outcomes can be monetized; in other words, the economic value they create can be measured in dollars. Increases in a person’s income lead directly to increased tax revenues and decreases in public entitlements and reduced costs for incarceration. These ingredients can be compared across similar programs or between program areas to determine which provide the best social return.

In this way investors, including philanthropists and legislators, can make objective decisions about where to invest and, yes, where to cut. Minnesota has been utilizing this approach for the last 14 years to incentivize and reward a workforce development program, Twin Cities RISE!, through a pay-for-performance contract. Over that period, the state has realized $34 million in value from its $4.6 million investment, a whopping 624 percent ROI.

The Greater Twin Cities United Way has been working with the Minnesota state government to expand the use of ROI analysis by the state and philanthropies for allocating investment in social programs. The opportunities are huge.

It’s about time we retire the meat cleaver in favor of the scalpel. If we don’t, quality social programs that benefit client and taxpayer alike will be long gone. And the consequences to our social well-being? Devastating.

The content of this post reflects the views of its author exclusively.

This article was originally published on March 26, 2012
Related TopicsHealth care, Health & Fitness, Social Entrepreneurship

Author

Steve Rothschild
Ashoka Fellow and author of the new book The Non Nonprofit

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