Getting payment by results contracts right

Designing PbR contracts

This is the 12th post in a blog series looking at the lessons I’ve learned from a recent review of the payment by results literature.

Designing PbR contracts can be a tricky business with plenty of examples in the literature of commissioners and providers wishing they had never signed on the dotted line. In addition to getting the outcomes and payment incentives right, two issues are particularly critical:

1. The overall length of the contract.
2. The delay until, and interval between, incentive payments.

This post examines what the literature says about how to get the payment structure and length of contract right for PbR schemes.

[button-blue url=”https://www.russellwebster.com/Lessons%20from%20the%20Payment%20by%20Results%20literature%20Russell%20Webster%202016.pdf” target=”_self” position=”left”]You can download the full literature review here[/button-blue]

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Contract length

The literature agrees over the main parameters for consideration of contract length; arguing that contracts must be long enough for an effective intervention to be delivered and to ensure that sufficient providers are encouraged to take the risk associated with PbR and enter the competition.

Of course, there has to be a limit to contract length otherwise new providers cannot enter the market and, when re-tendering eventually takes place, there may be very few bidders, effectively minimising proper competition.

The challenge is for commissioners is to find an acceptable balance between these two extremes. Where longer contracts are preferable, commissioners can impose minimum performance standards which allows them to terminate contracts in the case of unsatisfactory performance, (see last week’s post for more detail on quality assurance and PbR).

The literature suggests that where a PbR scheme is hoping to stimulate a new approach and outcome targets are ambitious, it is reasonable to set a longer contract length (5-10 years) to encourage enough potential providers to entertain the risk that such a contract entails.

Delay between intervention, impact and payment

The issue of cashflow is a hot topic in the PbR literature with several studies highlighting the fact that many small providers will be deterred from bidding for contracts where outcome payments are delayed for many months or years.

Many schemes (e.g. the first three years of the Work Programme and the early years of the Transforming Rehabilitation contracts) seek to mitigate these effects by operating a partial PbR model with a fee paid for initial work undertaken.

Schemes working with people with long term complex problems (such as offending, substance misuse, mental health, homelessness) may need to work with individual service users for periods of well over one year to achieve sustainable outcomes. However, delaying outcome payments for this length of time (inevitably extended further by the measurement and verification processes) is impractical. Even the largest organisations cannot operate without income for long periods of time without incurring unreasonably high levels of additional costs.

It is arguable that PbR does not work well in settings where there is a long delay between intervention and outcome for three main reasons:

1. External variables (such as big changes in the economy for Work Programme type schemes) become more problematic – it’s more difficult to determine whether the intervention itself achieved the outcome.
2. Outcome payments cannot be withheld for very long periods if commissioners wish to sustain a diverse and commercially viable market.
3. Over extended periods, monitoring costs will outweigh the benefits of ensuring that outcomes have truly been achieved.

There is no consensus on how to resolve this issue. Many argue for the use of milestones as a way of recording “distance travelled.” While several others cite the most popular version of Goodhart’s law, that “when a measure becomes a target, it ceases to become a good measure”; in other words, it is likely that providers will focus on meeting the milestones (e.g. keeping someone in treatment) rather than the outcome (helping them become and remain drug free).

When PbR is used as a way of improving outcomes in an existing system, utilising established monitoring tools, this problem can be overcome. A US PbR scheme in a local drug and alcohol treatment system found that paying incentives monthly gave immediate feedback, rewarding progress and promoting buy-in, as well as avoiding cash flow problems.

Conclusion

The main message from the literature is that commissioners and providers need to pay considerable attention to the issues of contract length and payment arrangements at an early stage in proceedings.

The most reliable way of deciding on an appropriate contract length and a realistic payment structure which guarantees a workable cashflow for providers of different sizes is for commissioners and potential providers to engage in a modelling exercise at the pre-procurement stage.

Next week’s post turns our attention to perhaps the most commonly discussed (and intellectually intriguing) aspect of PbR schemes; why PbR contracts so often result in unintended or even perverse consequences — malversation is the technical term.

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 tool is now live – please check it out at: www.PbR.russellwebster.com