Is your market fit for PbR?
This is the seventh 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 prime drivers of PbR schemes is the desire to change a market, typically to open a public sector market to private (in particular) and voluntary sector providers. This post examines lessons from the literature for both commissioners and providers when a PbR approach is being used for a service for the first time.
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When PbR commissioning is led at a national level (e.g. Work Programme, Transforming Rehabilitation), there has been a recent tendency to make contract package areas large in order to have sufficiently large cohorts of service users to validate the outcome measurements which generate payments. Indeed, some commentators argued that the MoJ’s proposed cohorts for TR (which divided England and Wales into just 21 Contract Package Areas, amalgamating many of the existing 35 probation trusts) were still “relatively small.”
Clearly large contracts are likely to be more attractive to large providers and commissioners need to make decisions about contract size in this knowledge. The National Audit Office in its comprehensive report on PbR last year urged commissioners to be clear about their expectations for prime providers’ supply chains to ensure that smaller organisations (some of whom may have local expertise which cannot easily be replicated, at least in the short term) can be involved in service delivery. The NAO also suggests that commissioners may need to establish a safety net for the most vulnerable providers.
Many commentators criticised the way in which many voluntary sector providers were apparently used as “bid candy” in the Work Programme tendering process only to have very little involvement in eventual service delivery. The same commentators also condemned the way in which Prime Contractors sub-contracted to much smaller organisations under the same PbR terms as the main contract. This was felt to be unfair since small scale organisations found it difficult to cope with the cashflow difficulties of only receiving payment many months after having delivered the contracted service.
An official DWP evaluation of the influence of outcome-based contracting in the Work Programme noted that there was considerable imbalance in supply chains; one of the results of which was that end providers had very little contact with local commissioners.
These criticisms about Work Programme supply chains were heeded by the MoJ in the TR competition whose terms required Prime bidders to abide by the Merlin Standards and encouraged them to hold all or most of the financial risk and not pass this down to small sub-contractors.
Understanding your market
The NAO encouraged commissioners to understand the market before deciding on the form of the contract; in particular commissioners are urged to consider whether potential providers have sufficient financial resources to bid for a contract which requires considerable initial investment and where payments are delayed until the achievement of outcome measures has been verified. Commissioners are also encouraged to assess what level of risk potential providers may be willing to consider taking on.
One of the most obvious and productive ways for commissioners to gauge the market is to discuss possible contract forms with potential suppliers. A number of studies recommend that commissioners negotiate the details of schemes with providers, arguing that this approach promotes a culture of shared accountability which is a major contributor to effective provision.
A number of providers recommend that one way in which commissioners can mitigate risks in new PbR markets is by operating a blended model where not all contract payments are dependent on achieving outcomes.
So, the key lessons from the literature are:
- When considering introducing a payment by results approach to a particular sector/service, commissioners should ensure that they align the level of risk they wish to transfer with the “risk appetite” of current and potential providers.
- Commissioners should be aware that large contracts will attract primarily large providers and they will need to proactively prescribe any requirement that small/medium/local providers are to be involved in service delivery.
- It is extremely risky to procure a PbR service for the first time on a competitive pricing basis.
- There are many benefits in co-designing new PbR contracts with potential providers and service users.
Next week’s post turns our attention to perhaps the central challenge of PbR – defining and quantifying the right outcomes.
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 prototype of the tool is now live – please take it for a test run and let me know your views.