Why Agencies Need to Spend a Little to Gain a Lot

Innovation funds have the potential to turn up effective and less expensive ways to confront today's challenges.

There's never been a time when the nation didn't face big challenges, although it may seem that they're coming at us faster than ever given the deadly novel coronavirus pandemic and intensifying concern about racial and economic inequality. More than ever, tackling societal challenges will require federal, state and local governments to turn to innovation that's supported by credible evidence. But how, during a time of such severe budget pressures, can governments afford to develop new and innovative approaches and test whether they actually work?

An important step that public agencies should take is to carve out a small portion of their budgets—say, 1% of program dollars—to create an innovation fund within every major program or portfolio of related programs. That might include innovation funds focused on reducing opioid addiction, boosting high-school graduation rates or lowering prison recidivism, for example.

Innovation funds should be structured so that agencies can use a variety of strategies, depending on the types of problems being addressed and the specific situation. Those strategies could include:

  • “Tiered-evidence” grants to test, validate and scale effective policies and interventions. This approach draws on successful models at the federal level, such as the Education Innovation and Research (EIR) program at the Education Department and the U.S. Agency for International Development’s Development Innovation Ventures program, which was co-designed by Nobel laureate Michael Kremer. Tiered-evidence grant programs take a page from venture-capital firms by placing bigger bets where they see more likelihood—more evidence—of a big return, while placing smaller bets on less-tested but promising approaches. This kind of grant program led, for example, to the scaling-up of an evidence-based K-12 program through funding from EIR that has helped to improve outcomes for thousands of children.
  • Prizes and challenges that use cash awards and other incentives to cast a wide net for innovative solutions to priority issues. The competitions are open to individuals, businesses, institutions or non-profit organizations — including those from unrelated fields, underscoring how good ideas can come from unexpected sources. It’s an approach probably best known from the website, which highlights prizes and challenges established by federal agencies. One example of a successful challenge was the Food and Drug Administration’s competition that sought faster, more precise methods to detect pathogens in food, with the winner creating faster detection techniques for Salmonella.
  • Outcome payments (also called “pay for success”), which require specific outcomes to be achieved by providers in order to trigger payment, but still allow for innovative approaches to achieve those outcomes. Recent projects have included a focus on reducing prison recidivism among women with substance-use disorders in Oklahoma, improving outcomes for youth involved in both the child welfare and juvenile justice systems in Illinois, and addressing homelessness in Los Angeles County and Denver. Results so far include the finding that Denver’s pay-for-success initiative on homelessness is paying off, moving more of the city's homeless into supportive housing while reducing jail stays.
  • Waiver demonstrations that allow jurisdictions or providers to modify existing program rules, within limits that protect vulnerable populations, while requiring providers to undergo a rigorous program evaluation to determine how well the new approach works and whether it is cost-effective. Rule modifications might include, for example, the ability to blend funding streams to better serve specific populations. The federal government has used this model successfully in some of its major entitlement programs. For example, the Center for Medicare and Medicaid Innovation used a waiver to test a different payment model for Medicare providers that resulted in an average savings of $1,230 for hip or knee replacements, without notable quality differences.

In some cases, public agencies will require new authority from Congress, city councils or other governing bodies to create innovation funds. Those agencies should explain how innovation, when coupled with strong evaluation, could move the needle on top public priorities. They can also emphasize best practices in the private sector: Leading companies from Apple to Zappos not only see innovating as essential but put significant resources behind those efforts. Public agencies have a different mission, yet they also need the capacity to test new approaches and rigorously determine if they work.

In the face of the multiple challenges the country faces, it might seem tempting to hunker down and see innovation as a luxury. In reality, it’s more important than ever to find effective and less expensive ways to tackle those challenges. Public agencies should start by launching innovation funds for their highest-priority program areas, and then expanding from there.

Andrew Feldman is a director in the public sector practice at Grant Thornton and also hosts the Gov Innovator podcast. He served as a special adviser on the evidence team at the White House Office of Management and Budget in the Obama administration. 

Kathy Stack is an independent consultant. She served for more than 30 years in the federal government, including 28 years at the White House Office of Management and Budget.