Can payment by results stimulate innovation?

 PbR and innovation

This is the fifth post in a blog series looking at the lessons I’ve learned from a recent review of the payment by results literature. One of the main reasons that proponents of PbR champion the approach is because of its potential to stimulate new answers to old problems.

But do PbR schemes stimulate innovation?

You can download the full literature review here

 

New answers to old problems?

Politicians and social investors have made much of the potential advantages of payment by results for stimulating innovative approaches to entrenched social problems.

Perhaps the classic model of PbR is one where the commissioners stipulate the outcomes they desire and then wait to see whether providers deliver them, safe in the knowledge that if providers fail to meet the contract requirements, they will not be paid. This model typically espouses a “black box” approach where providers are free to design the service in any way they see fit. This freedom is the factor that facilitates the ability to innovate combined with the fact that providers will not need to invest time and resources in regular performance monitoring and meetings with commissioners, being judged instead solely on the outcomes they achieve.

black toolbox isolated on white

The evidence

To date, the evidence on whether PbR stimulates innovation is very mixed. There are a number of positive examples:

  • An evaluation of the St Giles Trust through-the-gate prison resettlement model (subsequently used in the Peterborough and Doncaster Prison PbR pilots) found that it brought a tenfold return on investment.
  • Research into a PbR approach to substance misuse provision in Delaware, USA fostered the adoption of new, evidence-based clinical interventions and an expansion of opening hours (for more details, see the 3rd post in this series).
  • The DCLG evaluation of the London rough sleepers pilots praised the innovative navigator model (see here for a summary of the evaluation).

However, these examples are in the minority. The DWP-commissioned study of the outcome-based contracting of the Work Programme  did find innovation in provider-led pathways; but these were much more about reducing operational costs and achieving performance efficiencies rather than developing new, more effective ways of helping long-term unemployed people into work.

PbR can reinforce old methods

A number of research studies found that, especially when contracts were very tightly priced, providers felt pressurised to stick to tried and tested methods of working for fear that they would not get paid and their service (or indeed organisation itself) would fail. This same attitude often applies to investors too when, as is frequently the case — especially in the US — PbR schemes are funded by Social Impact Bonds or other forms of social investment.

This “we can’t afford the risk of being innovative” phenomenon has been found to be the case in an number of arenas:

International development (see this report by Bond International)

KPMG found this to be particularly true for Australian schemes funded via Social Impact Bonds where they found a contradiction between the goals of service innovation and building an investment bond on a sound evidence base (report here).

Similarly, NCVO found that although champions of PbR claim that the approach is an opportunity for the voluntary sector, cherished for its culture of innovation, in practice government PbR contracts have often favoured the largest providers with a “blunt instrument” approach.

The research has found that PbR encourages such close attention to measurement systems that the focus of commissioners and providers is often much more on numbers than on new ways of working.

What forms of innovation?

A review of PbR for the RSA argues that payment by results tends to encourage three categories of innovation:

  • Identification of those beneficiaries for whom particular service models will work best;
  • Creation of effective management processes (for example, through joining up fragmented supply chains) enabling services to be tailored to different classes of beneficiary; and
  • Encouragement of much greater co-production on the part of beneficiaries.

If commissioners want innovation, they must pay for it

In their comprehensive report on payment by results last year, the National Audit Office summarises this situation and acknowledges that current PbR models do not seem automatically to stimulate innovation and recommends that where commissioners are specifically seeking new ways of working, they should consider incentivising them.

In other words, if you want PbR to stimulate innovation, you need to pay for it.

 

Next Wednesday’s post will explore what the literature tells us about the role of payment by results in transferring risk from commissioners to providers.

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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