Designing payment by results schemes (NAO 4)

The NAO cautions that in designing PbR schemes, commissioners need to get the balance between pure PbR and non PbR payments right. Where a scheme is financed by a Social Impact Bond, it may be possible - and indeed appropriate - to stipulate that 100% income is dependent on achieving the specified outcomes.

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This is the fourth in a series of posts on the National Audit Office’s recent report: Outcome-based payment schemes: government’s use of payment by results. The report’s overall conclusion is that because of the lack of a clear evidence base, the PbR approach is currently laden with risk.

Designing PbR schemes

One of the most attractive features of NAO reports is that they focus on the real world and provide concrete guidance in the hope of improving performance.

Payment by results is a technically challenging form of specialist contracting and one of the key findings of the NAO report is that poor design and implementation has had a negative impact both on the quality of services and value for money.

Based on their review of government PbR schemes (primarily the Work Programme, Transforming Rehabilitation, Troubled Families and International Aid), the NAO highlights two key areas for commissioners to focus on in designing PbR schemes:

  1. Setting outcomes and performance expectations
  2. Ensuring payments create positive incentives

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Setting outcomes & performance expectations

The importance of clearly defining measurable outcomes is obvious in PbR contracts, but can prove difficult in practice, particularly when schemes have several objectives such as the Troubled Families programme which aims to “turn around” families facing multiple problems. The DCLG has tried different approaches; initially identifying a small number of tightly defined national indicators on which to base payments, including securing employment or reducing truancy and antisocial behaviour, before moving on to broader (and harder to define) measures based on the achievement of both “significant and sustained progress”.

It’s also important that commissioners set performance expectations that exceed either current performance or what happens without any intervention. For instance, much of the early criticism of the Work Programme was based on the fact that providers were finding employment for less than 5% of their service users, even though research suggested that 5% long term unemployed typically found work without any help from government agencies.

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Positive incentives

Perhaps the single most important component to get right in a PbR contract is the incentive. If a provider is being totally or mainly paid for achieving a particular outcome, you can be sure that it will be their number one priority. However, if there are a number of different incentive payments, commissioners must make sure they are properly aligned. A great example of this was the Work Programme when there was a significant payment premium for getting people off incapacity benefit (as it was then) into work. However, even the £2,000+ payment did not reflect how much the intervention cost with the result that almost all providers totally disregarded this group and invested all their energies into getting easier-to-place service users into work in order to ensure their cash flow.

This approach, known as “cherry picking” (see my guide to PbR jargon) is something that PbR schemes are particularly vulnerable to.

The NAO recommends understanding the motivation of likely providers, characterising large private providers as:

  • seeking to maximise profit;
  • having  moderate to good access to working capital and a balance sheet that can sustain them in the gap between intervention and payment; and
  • having a reasonable appetite for risk.

And smaller voluntary sector providers as:

  • having to pursue their charitable objectives;
  • tending to have a lower appetite for risk and lower working capital;
  • finding it harder to sustain themselves financially in the period between intervention and payment; and
  • struggling to absorb losses if outcomes are not attained.

The NAO recommends that commissioners ensure that there are sufficient numbers of larger providers with healthy financial reserves to be able to bear the costs and delays in payment which are typical of a PbR contract. Alternatively, if the expertise of the voluntary sector is required, commissioners should make sure that either finances are provided by investors in a Social Impact Bond (as in the Peterborough reoffending scheme) or that larger private providers are paying voluntary sub-contractors up front and not letting them bear the (potentially fatal) risk of delayed outcome payments.

When commissioners don’t get the incentives right, there may not be sufficient numbers of potential providers to let the contract. This was the case when the MoJ tendered a reducing reoffending service at Leeds Prison, only for 5 out of the 6 potential providers to withdraw from the competition because they felt the contract was not financially viable.

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Conclusions

The NAO cautions that in designing PbR schemes, commissioners need to get the balance between pure PbR and non PbR payments right. Where a scheme is financed by a Social Impact Bond, it may be possible – and indeed appropriate – to stipulate that 100% income is dependent on achieving the specified outcomes. But in other  schemes, where providers have to supply their own working capital, it’s not realistic to expect organisations to deliver a service for one-two years without receiving any remuneration. In these cases, NAO recommends a a split system with providers receiving some payments for the service provided (such as the attachment fees paid in the Work Programme) and the balance on a payment by results basis.

Both the Work Programme and the new probation Transforming Rehabilitation contracts were designed to increase the proportion of PbR over the length of the contract which is a more realistic approach.

 

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