Payment mechanism design overview
Last week (10 February 2014) the MoJ published another batch of 29 documents relating to the new probation contracts. Amongst these was the latest information about the payment mechanism. This is not the final version – the document is called the “Payment Mechanism Design Overview” but does provide more information than we had before.
Maximum Annual Payment
We already knew that there were two elements to the payment mechanism: Fee for Service (FFS) and Payment by Results (PbR):
- The FFS is primarily paid for mandated activities that deliver the sentence of the court and licence conditions and includes Through the Gate services and Rehabilitation Activity Requirements.
- PbR is paid for “statistically significant reductions in reoffending against the historical baseline”.
We now know that these two elements are related via the Maximum Annual Payment (MAP). The MAP is the total available funding in any year for a Contract Package Area. Providers will be required to bid a FFS for each year of the contract. The difference between the FFS bid and the MAP will form the basis of the amount available for PbR.
It seems clear that those providers who bid a lower price for the FFS will have a better chance of winning the contracts. This seems sensible to me since they will have to deliver an effective service and reduce reoffending in order to make up the full value of the contract via PbR.
The MoJ is requiring new providers to include a “learning curve discount” – effectively reducing the price every year, this has the effect of increasing the PbR proportion of the contract every year. The graphic below from the document is based on a MAP of £11m and a Maximum Biddable FFS of £10m:
Binary vs Frequency
The MoJ has decided to stick to its decision to make PbR payments on both binary (reducing the proportion of people who commit further offences) and frequency (reducing the total number of offences) measures. However, providers can only receive the frequency payment if they meet the binary target – the so called binary hurdle remains in place.
The new document gives the first indication of pricing for successfully reducing reoffending:
- The unit payment for achievement on the binary metric is £4,000 per offender who desists from reoffending.
- The unit payment for achievement on the frequency metric is £1,000 per reoffence avoided.
[Of course, these payments are only received if providers succeed in reducing reoffending past historical levels.]
What else do we know?
The payment mechanism design overview does address a number of other key issues which all providers have been waiting to hear about and which are critical for the pricing of bids:
- There will be a PbR bedding in period of between 6-9 months depending on when exactly the contracts start – the MoJ document envisages the start dates as being some time between October 2014 and July 2015.
- The first year MAP will include funding from the MoJ for the “Voluntary Early Departure Scheme” – redundancies.
- The baseline for reoffending rates will be for offenders starting community sentences or who were released from prison in 2011.
- If providers fail to match existing reoffending rates, deductions will be made to the FFS they receive and they may have their contract terminated.
For those of you interested in the detail of the new payment mechanism, there is a further document (number 11) within the same batch of 29 documents which provides a full schedule and all the technical detail of the proposed new contracts.