Can payment by results save money?

 PbR and saving money

This is the fourth post in a blog series looking at the lessons I’ve learned from a recent review of the payment by results literature. PbR in this country in particular has mainly been used for public services whose budgets are being substantially reduced, meaning that it has become strongly identified as a cost-saving tool

But do PbR schemes save money?

You can download the full literature review here

Improving value for money

Of course, if PbR schemes achieve their outcomes (as some do and many don’t – see last week’s post), they do represent good value for public money since, for instance, a homeless person in sustainable housing (see the London rough sleepers PbR scheme) makes a much reduced demand on public services.

However, PbR has been increasingly used as a mechanism for cost cutting – both the Work Programme and the new privatised probation system (known as Transforming Rehabilitation) introduced PbR contracts at the same time as very substantial budget cuts.

Cutting costs

However, much of the research warns against using PbR solely or predominantly for cost cutting.

A review by Richard Johnson on the lessons to be learnt from (the many) Australian workfare schemes recommends strongly that such schemes should not be competed on price for three main reasons:

  • It encourages “gaming” with would-be contractors over-promising and subsequently under-delivering.
  • It drives down quality and, consequently, performance.
  • It strongly encourages providers to respond to under-priced contracts by creaming (focusing on the easiest to help end users who may have found work without government intervention) at the expense of parking (providing a very minimal service to) those who are harder, and therefore more expensive, to help.

A common theme in the literature is the winner’s curse, a phrase used to describe the phenomenon where a bidder (typically for a very large government contract) prices their offer at such a low level to win the contract that they subsequently find it impossible to deliver an effective service within budget.

The research suggests that this is a particular risk when a service is commissioned on a PbR basis for the first time, recommending that in these circumstances:

Fixed-price competition based entirely on quality may be more appropriate

A recent US study which examined the growth of Social Impact Bonds (SIB) or other types of private or philanthropic investment vehicles to fund Pay for Success schemes found that the SIB approach often entails considerable extra expense.

The complexity of schemes often entails transaction costs beyond the loan and interest of funding, including the cost of legal services, evaluation, programme administration and loan management. The study notes that these costs may incur considerable extra costs compared to a direct commissioning approach and that many State governments are effectively paying a considerable premium in order to access private finance up-front.

Conclusion

One of the key themes which emerged from the literature is that although payment by results may be an effective commissioning approach in certain circumstances — this blog series will soon move on to critical success (and critical failure) factors — it needs to be carefully planned with a clear rationale.

Currently, as the National Audit Office found in its rigorous overview of PbR last year,  too many schemes are not carefully planned and are driven through because PbR is championed by government and is thought to cut costs. The NAO makes it clear in its conclusion that:

Commissioners may be using PbR in circumstances to which it is ill-suited, with a consequent negative impact on value for money.

 

Next Wednesday’s post will explore what the literature tells us about the role of payment by results in stimulating innovation.

I reviewed the literature as part of a project funded by the Oak Foundation to develop an interactive tool to assist commissioners and providers to decide whether a payment by results approach might be an effective approach to commissioning a particular service.

The tool is now live – please check it out at: www.PbR.russellwebster.com

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