Health impact bonds

In the health sector and more specifically when looking at preventive healthcare products and services, the party actually using the product/service is most of the time not the main financial beneficiary. He or she may indeed be the health beneficiary, but the most important financial benefit generated by the product/service often lies elsewhere. This beneficiary is the beneficiary with the highest willingness to pay for the product. In many cases of preventive healthcare products/services, this will not be the person potentially experiencing a health benefit from the use of the product/service. Instead, it will be that party who is able to realize large financial cost savings thanks to the product/service. Therefore, and this makes the health sector unique, it is important to make a distinction between two types of beneficiaries: health beneficiaries and financial beneficiaries. Take, for instance, the example of a serious game that is developed in order to reduce obesity of its users.

Health beneficiaries (the users): if the serious game works like it should, the users should enjoy health benefits such as reduced body weight related health issues such as type 2 diabetes, heart diseases and strokes, sleep apnea, etc…

Financial beneficiaries (the health insurers or government): if the serious game works like it should, the health insurance companies or the government – who would otherwise face serious financial costs due to the obesity, diabetes, heart diseases and other weight related health problems of their customers/population – should enjoy high cost savings.

The problem here: Although the health beneficiaries are the actual users of the preventive product, most of the time they do not have a willingness to pay that is sufficient to cover the development and commercialization costs of the preventive product.

This is why more sophisticated revenue models are needed in order to convince the financial beneficiary – who is an indirect beneficiary of the preventive product – to invest in the development and commercialization of the preventive product. One possible way to do this, is by using Health Impact Bonds.   

In a health impact bond, investors with a social impact ambition and willingness to take high risk (e.g. philanthropic foundations) invest in the development and pilot phase of a preventive health product/service. When – after a formal impact assessment -  it proves to be effective for the health beneficiary and reduces costs for the financial beneficiary, the product/service is scaled-up by a social impact investor. It should however be stressed that although this party typically invests a multiple compared to the philanthropic foundations from the pilot phase, they do not take as much risk since they have the results of the formal impact assessment.

HIB pilot phase

In the scale-up phase , another formal impact assessment is performed by an independent impact evaluator. If the scaled-up product/service proves to be successful, the financial beneficiaries will pay back the social impact investor from the scale-up phase and the philanthropic foundation from the pilot phase.

This financing model may seem complex, but it allows preventive products/services to be developed and produced that would otherwise not be economically justified.   

Scaling up fase