PbR Principles – getting your reward structure right

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

Principle 3: A well-designed payment and reward structure

The Audit Commission helpfully encourages commissioners to consider a wide range of PbR reward structures with an emphasis on schemes where only some of the funding is dependent on results.

It points out that many small providers are unlikely to be to carry the financial risk of failure if they are to be paid solely on a PbR basis.

However, the Commission also explores the opposite point of view. It states that small financial incentives can have large positive effects with as little as 1.5% of the total contract dependent on performance, but cautions that such an approach may not focus enough on outcomes or achieve sufficient transfer of risk and reward to achieve the underlying objectives.

The Work Programme approach

To illustrate this point, the report takes a detailed look at the payments and reward structure of the Work Programme.

The Work Programme is often described as the largest PbR scheme in the world and it does fit some of the classic PbR criteria in not being prescriptive about how providers work with unemployed people to get them back into work.

It has quite a sophisticated payment and reward design which varies payments according to how difficult it is likely to be to place different groups into employment – it’s obviously much harder to find work for the long-term unemployed, or those with disabilities or drug and alcohol problems.

Therefore, the Department of Work and Pensions has designed a pricing model which incentivises providers to work with all groups and not to just “cherry pick” the easiest cases.

The programme has three main payments:

  1. An attachment fee – to assist with initial service delivery costs.
  2. A job outcome fee – to encourage getting as many individuals as possible into work.
  3. Sustainment payments – paid for individuals who remain in work; this is to discourage providers just placing unemployed people into “Mcjobs”.

Types of payment

Usually, when we discussed PbR payment structures, we think about bonuses for achieving positive outcomes.

However, the Audit Commission also explores the “repayments” approach when the provider must either pay back or not receive funding when it has failed to achieve the agreed results.

Although the repayment approach is much less common, it can have a strong motivational effect on providers.

The commission also recommends that whether a scheme favours bonus payments for good performance or repayment penalties for poor, it is good practice to include respectively a payment cap (to ensure that a very successful scheme does not become too expensive) or a guaranteed payment floor (to reduce the risk for providers).

Timing of payments

It is clear that although many commissioners would like to pay only on the successful completion of outcomes, this is not always realistic as many schemes may take years to deliver and even longer for outcomes to be validated. This sort of approach only really works for very large private sector businesses or where schemes are funded via Social Impact Bonds or the like (covered in next week’s post).

The Commission makes a helpful suggestion that the public reporting of results can be used to encourage providers to perform well and suggests that commissioners make this a contractual requirement and specify exactly what information should be published within a set time scale.

Conclusion

I think one of the best aspects of this Audit Commission report is the way that it explores PbR schemes from a first principle point of view and opens the debate back up so that a variety of models can be considered.

It has been my opinion for some time that a “horses for courses” approach is by far the best one for the payment by results approach.

 

 

 

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