Payment by Results is a risky business

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This is the second in a series of posts about the five principles of PbR commissioning set out in a recent Audit Commission report.

 

Principle 2: Understanding risks and accountability

One of the principal reasons that the Government (particularly the Treasury) is so keen on the PbR approach is because of the transfer of financial risk away from the public purse.

The Audit Commission report helpfully makes it clear that it is not possible to transfer away all risk, by posing some key questions:

  • What happens if a scheme fails?
  • Or succeeds so well, a council/government department can’t afford the payments?
  • Will elected members still be held accountable for performance.
  • What about the impact on (the usually vulnerable) client group?
  • What about the commissioners’ reputation?

Expert commissioning

The commission then goes on to highlight the technical nature of PbR commissioning, stating that it requires technical, financial and legal expertise.

This is one of the hidden costs of PbR.

Organisations keen to explore the potential of PbR should be aware that this level of expertise is not easily available. Much of it resides the with financial intermediaries such as Social Finance who have pioneered the development of social impact bonds (of which more in week 4 of this series).

It is likely that councils and others who wish to commission PbR schemes will need to assemble a commissioning team with expertise in a number of key areas:

  • Understanding the service users/target population and in particular what the key outcomes (which will determine the payments) should be.
  • A knowledge of the provider market – is there sufficient expertise and appetite for PbR to encourage healthy competition and different approaches?
  • Technical skills to construct a fair, accessible and legally and financially sound procurement process.

Creating a level playing field

In my opinion, one of the key challenges will be to construct a robust legal framework which does not impose heavy bureaucratic demands on smaller voluntary and community sector providers.
The local knowledge and networks of small providers are often critical to initiatives which successfully tackle entrenched social problems. It is vital that the PbR commissioning process does not exclude them.
There are too many stories of large providers sub-contracting the work to smaller agencies whilst taking a large management fee off the top.
I think that commissioners should require the financial arrangements of sub-contracting to be explicit in bids and make the fairness of these arrangements one of the criteria for tender evaluation.
Commissioners should also take responsibility for ensuring that the division of payments for successful outcomes is fair and clearly defined.
This is to avoid different partners all claiming credit for the same outcomes. It is vital that partners work collaboratively to achieve outcomes, not attempt to game the payment system to maximise their own profit.

Commissioning across departments

The Audit Commission acknowledges that joint commissioning will be even more complex but advocates the use of Community Budgets as one way of combining funding streams to tackle local priorities.
The overall conclusion for me is that local councils who are commissioning large scale PbR schemes need to take responsibility to maximise their chances of success and not be seduced by the:
“Don’t worry about it, if it fails, we don’t have to pay” approach which is becoming increasingly common.
Next week: getting the payment and reward structure right.

 

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