Can Financial Securities Investment Prevent Diabetes?
The financial industry probably isn't the sector you'd immediately think of when asked who will solve our nation's struggle with diabetes. What do traders and investors have to gain, after all, by helping the 72 million American adults who are projected to be pre-diabetic by 2020 avoid a lifetime struggle with the often fatal disease? The answer, according to a winning team of MBA students, is a 13% ROI.
When Net Impact first heard about the International Impact Investing Challenge (I3C), we knew it was right up our alley. The challenge, hosted by the Kellogg School of Management and Calvert Foundation, awards $15,000 to a team of business school students who pitch the most well-thought-out design of an investment vehicle that creates sustainable impact, particularly one that can realistically attract institutional investors for wide-scale implementation. We love that I3C gives our student members the opportunity to apply the financial skills they're learning in the classroom to real-world issues like disease prevention and social impact investing, says Sarah Coleman, Senior Manager of Experiential Learning.
Pay for prevention, or pay for treatment?
By 2020, half of the American population will suffer from type 2 diabetes or prediabetes, costing the healthcare system more than $400 billion. Treating someone with full-blown type 2 diabetes through programs like Medicare is expensive; it costs approximately $10,100 per patient each year. Treating a prediabetic, on the other hand, only costs about $800 per year. Imagine the savings if we just treated the prediabetic instead of waiting until they've developed the disease.And the amazing thing? There's a prevention program that actually works. The CDC, National Institutes of Health, and George Washington University have developed a research-based program with a demonstrated success rate. The one-year lifestyle intervention is delivered through local providers like the YMCA, making it accessible to virtually anyone living near a local Y.Funding such a program seems like a no-brainer, right?
But the current system isn't set up that way. Currently, healthcare in the United States is reactive, rather than focused on prevention, says Kellogg MBA candidate and Net Impact member Nikki Tyler. This intervention has not been scaled due to misaligned incentives in the healthcare system and a lack of capital. Simply put, the YMCA doesn't have the resources needed to avoid this impending epidemic.
Less disease, bigger profit
With this in mind, Nikki and a team of four other Kellogg students (William 'BJ' Bronston, Rebecca Johnson, Ratula Milly Shome, and Jordan Walker), have designed a financial product they believe will incentivize private investment in the YMCA program, while delivering big return for those investors via the savings accrued through reduced instances of fully-developed diabetes.The team devised a security funded by private investors. At its simplest, the security invests in diabetes prevention programs across the country, scaling them so they can treat the 20 million prediabetics covered under Medicare. Medicare then pays out a pre-negotiated amount to the security based on its cost savings thanks to intervention, which is distributed back to the fund's investors. Even with high attrition rates for participants and potentially lower-than-expected prevention numbers, the team estimates a 13% ROI.
Facing the challenge of cross-sector collaboration
There are some hurdles, to put it conservatively. To begin with, the security managers would need to negotiate the amount of payouts with Medicare. That would involve more than just agreeing on the size of the check per patient; it would require identifying patient outcome goals, evaluation metrics, provider requirements, and more. Even the team admits this is tough nut to crack. We foresee coordination on this scale being the biggest challenge in implementation, says Nikki.So why bother? There is a tremendous opportunity with the Medicare-eligible population, she points out. The 20 million prediabetics under Medicare provide the security with a steady influx of potential savings payouts. Additionally, the federal government has demonstrated an interest in working with programs like this. Its Center for Medicare and Medicaid Innovation supports the development and testing of innovative healthcare payment and service delivery models just like this. And some states are passing legislation that seeks to reduce Medicare costs through improved health outcomes.
For Nikki and her team, that bodes well. The team plans to first launch a pilot product that will create an ecosystem to demonstrate that stakeholders across various sectors can come together to affect social change and drive financial returns through impact investing.
Bringing home the win
Winning the International Impact Investing Challenge has netted this group of MBAs, all of whom plan to graduate this summer, more than just a $15,000 prize that is sure to help build their proof-of-concept. The team has made valuable contacts in the impact investing and healthcare industries that continue to help them understand the opportunities and challenges they face. It was wonderful to see firsthand so many people believing that business and impact can thrive simultaneously, says Nikki. Moreover, all the competing projects projected either a market return or above-market return - demonstrating that impact investing is not simply a synonym for philanthropy.
Visit I3C online to watch the team's competing pitch, along with the other incredible finalists.