Featuring José Diaz

Kurt talks with Dr. José Diaz, an economist and the Chief Impact Officer for the Constellation Fund, a non-profit dedicated to “smart philanthropy.” Traditionally, a non-profit’s success is judged by how much it fundraises, not how well it impacts society. Constellation Fund flips that and measures return to build philanthropy that works. Kurt and José discuss calculating impact and using that information to put resources where they will do the most good.

Kurt 

José, thanks for joining me this afternoon.

José 

Thank you so much for the invitation.

Kurt 

Yeah, looking forward to learning a little bit more about your work, maybe give us some of your background.

José 

Sure. I’m José Diaz. I’m an economist. I’m the Chief Impact Officer at the Constellation Fund, which is a philanthropic organization here in the Twin Cities. And we base our model on benefit-cost analysis. So, it’s a really new way of doing philanthropy.

Kurt 

So, Constellation Fund, maybe you could give us an example of what do you mean by benefit-cost analysis? And how does that work?

José 

Sure. Benefit-cost analysis is a technique that we actually borrowed from the for-profit sector. And what it means is that we estimate the benefits of an intervention, a program, or even a policy and compare those benefits to the costs of producing those outcomes. And we do that by just dividing the benefits over the costs. And we obtain what we call a benefit-cost ratio, which is a number. If that number is greater than one, it means that the benefits are larger than the cost. If it is equal to one, that means benefits and costs are equal, so we are kind of in a breakeven, and if it is below one, then it means that the program costs more than the benefits that it is generating. So probably further analysis and consideration is required at that point. So that’s a very valuable tool to identify the economic value or worthiness of an intervention or a program. It could be used in isolation, like for individual programs. But I think the most interesting use is when you have several programs, and you compute a benefit-cost analysis for each of them, and then what happens is that you have a common indicator, an indicator that that is consistent across all these social programs that you’re trying to assess. And then you can compare them and pick the ones, or you will know which ones are more effective than the other in terms of economic terms. And then all sorts of things can happen, is you can make the same policy around those that information or make philanthropic investments like we do at Constellation Fund. All our applicants, we conduct benefit-cost analysis for all our applicants, grant applicants. And then, based on those benefit-cost ratios, plus other type of analysis that we do in terms of kind of the overall quality of the program, the financial health and the quality of the leadership. So, we combine the economic analysis with more qualitative analysis, and then we come up with investment decisions that are more truly data driven, which is kind of a new in the philanthropic world.

Kurt 

So, it’s like it’s analogous to a return-on-investment calculation. So, we’re looking at a suite of different investments and trying to determine which one is going to have the best payoff to the organization.

José 

Exactly. Like I said, this is a concept that we borrow from the for-profit sector. And any for-profit investor will tell you how important it is to have this type of information about a company or a stock that they are interested in investing in. So, it tells you, I used to say that benefit-cost analysis, or the benefit-cost ratio that you end up with at the end of the analysis is just at the tip of an iceberg, right? It’s just a number. But what’s behind the number is quite interesting.

Kurt 

So, do you have an example of, you know, a series of these investments you’ve analyzed and what does that look like?

José 

Sure. So, what we do is usually start by trying to understand very well what an organization or a program tries to accomplish, right? Because it, here’s what happens, in the for-profit sector, if you ask any accountant or financial person to assess the value of a business, the analyst will have all the information available, all the information that is necessary to compute an ROI. And that means usually for a typical business, you know, sales, revenues, that comes from how many units are able to sell, the price of those products. And then you compare that to the cost of producing those products, you know, labor, equipment, services that that you pay for. So, you have all the ingredients there. But let’s say you have a program that does home visiting program, home visiting services, and provide prenatal services for mothers, low-income mothers. And if you try to apply kind of the same logic that you would use in a for-profit sector, you will say, the first question would be, what is the product, right? Or the service. And that right there is, it’s already difficult, because you know, home visiting is kind of a very fluid concept. But let’s say you, you find a model, you define what you mean by home visiting and prenatal. But at the end of the day, what you want to do is, to know is the outcome of that service that you’re providing, and that’s even more difficult to figure out, right, because you provide prenatal care to pregnant women, and there are many potential positive outcomes that can come from that service. The overall health of the mother maybe improves, the overall health of the baby or the future baby can be improved. So, you have a list of potential positive outcomes. So, it’s not like when you ask Apple, what’s a revenue from an iPhone, right? That’s pretty much straight forward. For these types of programs, it’s a much more difficult question. Not only that, I mean, you can say, okay, a program does a prenatal program. And let’s say you pick an outcome like low birth weight, right? Prenatal programs are well known, and there is sufficient evidence to say that, women that received these types of services are less likely to have babies underweight. So that’s an outcome by itself. And you can probably count and measure that outcome pretty well, that’s what we do, we use research to find out what works. But again, what’s the economic value of that? Because to compute the benefit-cost analysis, you need an actual dollar amount. And what’s the value of a baby that is born healthy, right, compared to the value of underweight baby? That’s a much more difficult question. So we need to find good economic techniques to come up with a good and reliable number in terms of outcomes in dollars, and then we can probably finish the assessment and ask this program, well, how much does it cost to provide services to these women and compare those numbers. So that’s in a nutshell, you see that there are many kinks and many different ways to tackle this type of analysis.

Kurt 

Yeah, it’s fascinating because this is the same, I love this example. It’s very similar to the challenges that some of our customers are facing. When we walk into an organization like a managed care program where they’re responsible for the health of a population, particularly Medicaid, and they’ll say, boy, one of the areas we’re really challenged on are these, what they call, million dollar babies, right, these low term, low preterm births that have tremendous complications for both the mother and the child, and they become very expensive, and the outcome for the health of both of those individuals is very, very compromised. So, you know, we’ll look at the data and we’ll say, well, we can help you identify where that risk is coming from. So instead of waiting until that mother shows up in the emergency room late in the second trimester, and hasn’t gotten that prenatal care, let’s identify that earlier and get upstream, but then they’re left with the question of, okay, so we know where the risk is, but what do we do about it? And they might look at a suite of interventions, one of which might be home visits, but the challenge that they’re all having is how do we tell which one works? And how do we identify, do we put our dollars in home visits? Or maybe a nutrition program? Or counseling? Or where do we start?

José 

Yeah, and that’s not a different question than a philanthropist would face. Right? And it doesn’t have to be a rich philanthropist, right? If you have $1,000 to give to charity every year, one of the questions here is, where do I invest my charity money? So, I like animals, I like the environment, I like babies, I like, you know, fighting poverty. And how do you decide? In the case, as you’re mentioning, the good news, I think, is that there is plenty of evidence about what works, right? I would say 80-90% of health interventions and social interventions, there is some evidence of successful programs, right? And that evidence comes from the science field. So, researchers have spent a lot of time and resources figure out what works. Early Childhood Education is one of those, obesity, like you mentioned, home visiting, there’s tons of evidence in different types of models. The difficulty is that, and again, I like to compare it to Wall Street-type of decision-making information, if you are a broker, Wall Street, broker is that there is actually too much information. So, it’s actually information overload, to make investment decisions. But if you’re a social, or a nonprofit, organization trying to figure out a program’s problems, like you mentioned the information is scattered around the scientific literature, for example, so you have to conduct literature reviews, it’s not something that, it’s probably something that in your field will be a good opportunity. Sometimes that data is on the web, right? Scattered around hundreds and millions of web pages, or scientific databases. So, the challenge is to find that information, synthesize it, analyze it, and then come up with a good set of indicators or something that you can use to produce this benefit-cost analysis.

Kurt 

Yeah, you’re touching on an issue, which is a personal hot button of mine. As we’ve worked with these health systems and health insurance companies, employers and others, there’s a lot of literature, like you said, we know what works, right? We know how to, you know, reduce obesity, we know how to deal with nutrition and fitness, and we know their impact on health. The challenge that most of these organizations have is figuring out who pays for it, and how do the dollars flow? If we know we have a thing that works, who benefits from that thing that works, and then whose pocket do we tap to go ahead and pay for it? And that kind of shifting those dollars away from the traditional things of paying for health care after someone’s sick to try and shift those upstream to prevent someone from becoming sick in the first place, that’s where I want, you know, I’d love to have more data from this return-on-investment concept to be able to prove that and move those dollars.

José 

You’re absolutely right. Now you’re working in the health sector, which is a very complex sector, I don’t have to tell you that. Because all the payment systems are complicated, to say the least. And there are many other factors that come into play, the stakeholders in this type of program, the problems are many, and each of them have different interests. So, it’s a mess to say the least. But, and again, I think I totally agree. I think it’s not that we don’t know what works, the difficulty is to design interventions that actually show value to the right individuals or the right, you know, players in the game. I like to think for example, social entrepreneurs in general, that they know what they are doing, right, to some extent. The difference between social entrepreneurs and for-profit entrepreneurs, for example, if you’re a for-profit entrepreneur, how do you know your business model works, right? And that’s an easy question to answer. You try to invest your money, you find the capital, you try it out. And then if you’re losing money, the market would tell you, the consumers will tell you, your investor will call you up and say, Kurt, this is not working. Let’s either change the idea, or kill it, right, and try something different. And that feedback is pretty much on time, immediate, right, cause like you will know if your business model works or not. What happens in the non-profit sector? And again, I think the health sector is probably the most extreme example. But let’s say you have a non-profit entrepreneur that has a very good idea about an intervention. And what’s the first job that this person has to do is find capital, find you know, funding for that, that idea. How do they do it, right? They go to organizations like Constellation Fund, or the government or some philanthropists, and pitch the idea. So, at this point, there is not much difference between a social entrepreneur and a private sector or a for-profit entrepreneur. What happens after that is that these social entrepreneurs started the work, and he started serving these kinds of affected individuals. After a year or two, how do you know that that intervention actually works or not, right? So that is the same question that we’ve been asking, is, does it work? Is there evidence that shows that this works? But at the end of the day, it’s very difficult, the market won’t tell you if it works, or not in the non-profit sector, because your revenue stream is disconnected to the actual quality or effectiveness of the organization. So, and it’s weird, because in many social enterprises, what drives their success in fundraising and the revenues that they obtain? It’s not the quality or the effectiveness, it’s how good the director or the entrepreneur is in seeking these funds. So, it’s all, it’s very distorted market in a way.

Kurt 

That’s interesting. It’s analogous maybe to healthcare where the way the dollars get spent aren’t necessarily in line with the evidence that we have around how to produce good outcomes. So, what you’re saying is that people can raise money for a nonprofit to solve, to intervene to solve something, but the money they raised isn’t actually tied to the outcome. So as long as they’re good at the money raising, they can keep going whether or not the program is working.

José 

Exactly. And this is not, I mean, I have to qualify, I don’t want to sound too harsh to very hardworking nonprofit entrepreneurs who are doing a really good job. But I am sure there are many nonprofit organizations who pretty much wouldn’t make the cut if there was a kind of a free market type of feedback mechanism in the nonprofit sector. But again, the qualification also includes this kind of a moral aspect in the nonprofit sector. I use an example like, you know, if there is an issue in a given society about, let’s say, sex trafficking, right, we don’t want that in our community, right? So, we can all agree that that’s a bad thing that is happening. And we can all agree that we need to invest resources into solving that issue. If we conduct a benefit-cost analysis on sex trafficking, and I haven’t, but this is theoretical. If we conduct our benefit-cost analysis, and it turns out that negative or below one, at the end of the day, who cares? We don’t want our community to suffer from this problem. So, we are willing to invest in something that is not economically viable, but we want to invest money on that and solve that issue. So, there is this moral aspect that we need to take into account, too.

Kurt 

So how about the other side where we believe that there are, let’s describe a scenario where we believe there are positive impacts, but we don’t fund it. So, I look at childhood obesity. And we know that childhood obesity connects down the road with all sorts of bad health outcomes, so adult onset diabetes, heart disease, you know, shorter lifespan, all sorts of things. And it’s not that expensive to intervene early in a child’s life. So why doesn’t that, why don’t we make that connection? Why is that difficult for us?

José 

And again, we don’t have the timely feedback, if we knew all the benefits and costs around these kinds of easy to implement organizations, that will, I’m sure that will attract the right investors, right to that field. And that’s precisely what we try to do at Constellation, we have found programs. And I can give you a particular example. We fund a program that provides prenatal care, actually, to women who are in prisons, right there in the justice system, while they are pregnant. This is a relatively cheap intervention. And the benefits are huge. I mean, because these are million-dollar babies, too, right? You’re avoiding all sorts of problems with a very tiny cost, a very tiny investment. And that’s an organization that could easily go under the radar for many, many philanthropic investors, and even the government, because this is a bunch of, you know, home visiting health workers, it’s probably a handful people of doing this amazing job, and it has millions of benefits, millions of dollars in benefits. It’s very easy to overlook. That’s one issue. The other issue is, and I give you another example, I did a cost-benefit analysis for an integrated clinic. And that clinic was, it was a mental health clinic that was adding primary care inside, right? So, you people came for some mental health issue, but there was a primary care provider on site that can take care of other things. The combination of these two, the synergy was super effective, right? People suffering these conditions are less likely to come back or go to regular doctors and so forth. And they end up either calling for an ambulance or going to the ER, which is way more expensive than just preventive care. So, we did all this social return on investment. So, we counted, we estimated all the benefits for the government and for the participant. Very nice returns. So, we present this to the state legislature. Right, and the first thing that they look at, and this is typical of, you know, probably politicians in general, again, no pun intended with anybody, but the first question was, well, because we label all the public savings as taxpayers’ savings. So, they ask, well, are these state dollars or federal dollars? Right? Okay, I guess for you, it’s important to know that, but who cares, really, right? And that’s probably speaks, in general, to the health system where you have stakeholders thinking within their own square feet. And they are sometimes incapable to see what the benefits to other parties that are playing a role in this very complex system. So, it’s difficult. I wish there was an answer.

Kurt 

Likewise, I mean, I think that the challenge we have is whose pocket the money is, and that’s, you know, what you were describing between federal and state. One of the best examples we have here locally in Minnesota, there was a 10-year project that was done in New Ulm, Minnesota, and it was philanthropic, the Allina Foundation sponsored it, to go into this community in Brown County, and to intervene across the community to reduce heart attacks, right? So, they put in healthy food options and fitness coaches at employers, cooking classes and bike lanes and wayfinding and you know, very comprehensive, all evidence-based, all things that we know work, but they stitch them together into a comprehensive plan. And it worked, they were able to reduce the incidence of heart attack, along with a number of other things. Smoking went down, heart disease went down and other things, when you add up the benefits, so they invested, I think, a million dollars a year. The benefits, all told were well more than a million dollars a year to that community. But the problem was, the benefits didn’t accrue to Allina the hospital system, they accrued to the different insurance companies, including the government, through Medicare, and Medicaid, that covered all of those individuals. So while we were able to do that once in one community and demonstrate, there was no incentive to roll that out statewide or nationally, and that, I think, is the one of the things I’d be curious, your thoughts, you see a lot of these philanthropic enterprises that have demonstrated a benefit. But in reality, we need that benefit nationwide for everybody. How do we scale it? How do we get from, I’ve raised some money to do some good and demonstrate success. In the start-up world and entrepreneurial world, once I’ve raised my series A and I’ve demonstrated the thing works, well, then eventually we take the company public, or we sell to a big company, and it becomes a national scope. How do you do that with philanthropy?

José 

Yeah, the natural solution, natural path would be the government, right? It will end up with the government, you have to remember how that social or nonprofit sector came to be, right? We started at the beginning of time, let’s get very biblical here, at the beginning of time, there was just a for-profit sector, then we have government, right in between the two of them, they were tried to solve or address all the needs in our society, what ended up happening is that there were some needs that were not profitable. So, the for-profit sector says, No, I can do it, I wouldn’t do it for free. So, the government has to pick up those services, right. And those are the typical examples, education, health, you know, growth, blah blah blah. But then we figure out that there is a myriad of needs, and special markets that are not profitable. But the government also doesn’t want to get involved in those needs, for many reasons, right? It could be from political reasons or just pure ignorance, they don’t know how to do it, or they don’t know even that the problem exists, etc. So that’s where the nonprofit sector came to be, and say, okay, some private citizen say, okay, there is a problem with, you know, I don’t know, obesity, the government is not doing enough, the health providers are not doing enough, I can do something, have an idea how to solve that. So, let’s do the additional mile that that we were talking about some time ago, or these very creative ways of solving social issues. And then they have to come up with sources of funds and all this issue that we’ve been talking about. But the natural place for this needs to be solved is the government, in terms of, because we know unless we find a way to make the service profitable, and then we can call — well, Allina may be not for profit. So then, again, health is the most bizarre examples of all because they should be able to, they should be willing to do it, even if they are kind of, well, there’s an argument that they shouldn’t be losing money, but anyway. But again, the natural takers should be the government. I’ll give you an example. The Robin Hood Foundation, which is like our sister organization in New York, they follow the same benefit-cost analysis to do philanthropic investments, they funded, many years ago, the syringe exchange program where you avoid this bad issue with people who were taking drugs and so forth. And the government didn’t want to touch that at that at that time, because it was politically impossible to deal with those type of things. So, the Robin Hood Foundation funded a program dealing with that issue, and they show that it worked. It worked pretty well, and it has economic returns, and so forth. And after a while the government saw that, saw that the program was working very well, and they picked it up. And at some point, we would stop funding the program, because it was now all public funding. So, I think that’s the next level. And that’s what we usually talk about Constellation Fund and with other philanthropists is, how can we scale this up to make it a policy or a public sector investment? I think that’s a natural way to go.

Kurt 

That I like that. But it’s, I think it’s important in that analogy to remember that philanthropy can’t solve the problem for everyone. But it can demonstrate that success. So, if you use data to understand where we need to intervene, what’s missing? And that’s where that innovation happens in organizations like Constellation, evaluate that success to say, what’s working and what’s not working. And once we have a great idea, and we’ve proven it, then we scale it up and transition it either the for-profit world, to companies like mine, Carrot Health, or to the government to scale up and take on a more national basis. So, it’s equitable for everyone.

José 

Absolutely. And there is another layer of that, which is kind of the chicken and the egg problem is, okay, we need to show that these philanthropic interventions work, right? How do we do that? And we go back to the issue of where do we find that evidence with that data? How do we, you know, compound on all that evidence that is out there? And that’s where, I think, the next kind of a step in the philanthropy and nonprofit sector is, how can we capitalize in all this, to use the cliche, the big data in data analytics. Development is where all the for-profit, big corporations are just, you know, capitalizing in that information in ways we can’t even imagine. And the nonprofit sector is just sitting on a piece of paper that says how many walks through the door for your program, and you sit down with your philanthropist, investor, have coffee. Now, I guess it will be virtually, and asked for a check. So, you see the huge, if we’re talking about gaps, in terms of performance and disparities, there is nothing bigger than that.

Kurt 

I love it. You know, everything in my world comes back to data. So, I’m right in line with what you’re describing. It’s all about the data. And if we can collect enough data, we can move mountains.

José 

Right, right. And, again, that is probably preaching to the choir. But it’s not only about the data is, when you have your clients, the first question is, well, what do you want to do with the data, right? But we know, I mean, we want to show the value, we want to improve the effectiveness of these organizations, and eventually make the case so we can all as a society invest more in this type of things, either in the government or more philanthropic money, whatever those resources are coming from.

Kurt 

I’ve been saying this for 25 years, that that’s sort of the dirty little secret of the data industry. If no one takes a differential action based on the new data, you’re showing them, it’s not worth knowing, right?

José 

Yeah. Yeah. I mean, it’s very typical, what comes in — if you put garbage in, you have garbage out, right. But we, I love that black box kind of metaphor about production functions, like, we have this mystery that happens when you could mix all the inputs, and then you have a very nice product. So, you mix labor, capital, and ideally, you have an iPhone. Great, but what’s happening, right, in the design and in the how you connect these elements together and so forth. I think that’s when we know we have a long way to go in terms of understanding what’s the best production function for all these nonprofit products and services that we are dealing with. And again, it’s not that we don’t have hardworking people, or they, many of the executive directors and providers they know, at least empirically, how do their jobs very well. Again, I think I come back to the issue of feedback is nobody is telling you, and nobody could be a person, could be a data set, or could be the market. But if you’re not receiving the feedback on how good you’re doing your job, then you’re not improving at all. You can’t, there’s no way.

Kurt 

Yeah, that data as a feedback loop, I think that that’s an important concept. And I love that you’re bringing that concept into the, you know, the nonprofit world to try and improve how those dollars are allocated. So, we’re solving the right problems in the right ways. And I think for us, that’s very analogous to the challenges our customers are facing in health care. They understand that they need to move upstream and help prevent disease from happening in the first place, which is very similar to many of the social determinants or social barriers of health that the nonprofit world is trying to solve, but choosing which one of those interventions and where to start, that is the most common question we get across the board. When I look at my population, where do we start? And we call that an opportunity assessment to say, let’s look at the people and what they need. And let’s start there, and you’re coming at it from the let’s look at what’s working and let’s start with the programs that work, and that I think the intersection of those two has tremendous power for the future.

José 

Absolutely. I think there are different levels where you can tackle this issue. I mean, there is the provider level, which is probably where you are at, in the sense that, you know, the direct providers, but we are more in a way that we are philanthropic brokers in a way. The problem is that we don’t have, you know, a webpage that tells you how good a program is or how profitable it is, we have to do it in house. So, we have to produce that information. But that’s a secondary or second level in a way, because somebody has to show first that something works, and then we will figure out how to monetize that thing. And then the third level is what we just talked about is, okay, once you have the evidence, once you know, how can we scale up this and find the right investors for this, but I think we need to tackle all three, simultaneously. I think we cannot wait to do one or the other. It’s not a sequential thing, I think.

Kurt 

Agreed. Totally agree. Well, José, thanks. It’s been a pleasure to chat with you today. I look forward to learning more about Constellation as you evolve.

José 

Yeah, no, my pleasure. It was super fun. And for those who are interested, find Constellation Fund on the web at constellationfund.org and enjoy the ride with us, I guess.

Kurt 

Perfect. Thank you.

José 

Thank you.