Financing payment by results schemes is a tricky business

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

Principle 4: Sound Financing

As I have commented several times in this series of posts, perhaps the chief value of the Audit Commission’s report on PbR is its willingness to approach the subject from first principles, setting out a range of options, rather than making assumptions that the approaches garnering the most media attention at the moment are always the right ones.

So, in discussing ways of financing PbR schemes, the Commission considers a whole range of options, only one of which is the Social Impact Bond:

  • mainstream funding;
  • traditional loans;
  • pooled (including community) budgets;
  • charitable or social investment (such as SIBs);
  • private investment; and
  • providers funding themselves until they get reward payments.

The Commission notes that the type of funding affects financial planning and particularly the timing of payments.

Of course, it also affects the total cost of the scheme with Social Impact Bonds, for instance, both paying out a return on investment (if the scheme is successful) and, often, involving considerable time and expense to establish in the first place.

However, a SIB funding mechanism can be a way of ensuring that small voluntary and community sector organisations can at least be partners in PbR schemes. Maintaining a flourishing local voluntary sector should be a high priority in the current financial climate where charitable organisations are key to help local communities survive the cutback in public sector services.

By their very nature, PbR schemes which require providers to fund the initial service delivery themselves until outcomes can be produced and measured, are limited to large (mainly private) organisations.

I understand that one of the Drug and Alcohol Recovery Pilots was not contested by existing local providers because none of them had sufficiently high levels of turnover to cope with the cashflow demands.

Covering contingencies

The Audit Commission also provides a very helpful checklist for commissioners to help their financial planning across a range of possible situations:

  • The PbR scheme fails (and therefore needs to be decommissioned and another service commissioned to address unmet needs)
  • The scheme performs at very high levels (in which case there either needs to be a cap on payments for success, or a clear idea of where consequential savings can be “cashed” within a relatively rapid time frame. It’s important that incentives are set at a sufficiently high level to attract enough interest from potential providers, so getting this balance right is a critical aspect of effective PbR schemes.
  • The scheme creates more demand on existing publicly funded services. Conversely, demand is reduced on other services making them no longer viable.

It is also important that commissioners ensure that the full costs of establishing and administering robust outcome monitoring systems are covered at the financial planning stage.

Critically, it should be stipulated in the contract who is responsible for paying for the outcome monitoring system (the key features of which are covered in next week’s final post in this series).

Conclusion

Perhaps the critical success factor for PbR schemes is the high quality of financial planning which needs to be undertaken before the tendering stage.

I think we need a different approach to commissioning for PbR schemes with a wide range of potential providers being consulted openly about the key decision of which financing options are most appropriate.

Commissioners need to develop a detailed understanding of the risks and benefits of the main different funding mechanisms, acknowledging that no approach is without its downside.

 

 

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