Is Payment by Results Making Things Worse?

29/07/2015 15:51 BST | Updated 29/07/2016 10:59 BST

The way the public sector procures what it wants has been changing in recent times, and this looks set to continue. And this will affect organisations across the board, from charities to local authority commissioners.

Rather than pay a fee for the delivery of a service - an input - contracts are aimed much more at purchasing some sort of output.

This has been termed payment-by-results (PbR).

When it comes to interventions that are about social outcomes, the natural move has been to have payment linked to the achievement of those outcomes.

Rather than pay people who work with the unemployed, pay them only if they get them into work.

But, for all their appeal in principle, such contracts also have the potential to raise problems.

Many of these have surfaced in the Work Programme which uses PbR extensively.

As a consequence of the incentives PbR creates, we have seen attention given to the easiest way to help people back into work - so-called 'creaming'- and a relative ignoring of the less easy way to help - known as 'parking'.

We have seen contracts that have not priced things sensibly to encourage the right amount of risk transfer - with a number of providers finding the going tough and others having an easy ride.

And, we have seen charity sector providers finding it difficult to cope with the scale, risk and payment in arrears that PbR contracts imply.

Spending watchdog, the National Audit Office (NAO), has produced a new report into such contracts.

Although it is written in the civil service speak typical of such reports, it is not overly impressed by the rush to PbR contracts, at least until we have more evidence that they actually work better than other methods of procurement.

Alongside a general warning that 'PbR is not suited to all public services', the NAO put in the strong statement that: 'If PbR is applied inappropriately, there is a risk that either service quality or value for money may be undermined'.

In other words, rather than solving the problems of inefficient public services, PbR may be contributing to them.

The NAO's main criticisms are that PbR contracts are complex, take time to negotiate, and may not deliver in the end.

Picking up the argument made by its supporters that PbR contracts 'must' be more efficient, the NAO says: 'While supporters argue that PbR offers value for money, PbR contracts are hard to get right, which makes them risky and costly for commissioners'.

They are hard to get right because: 'It is difficult to design an effective payment mechanism and forecast the level of performance that would occur without intervention'.

The attraction of PbR - that you just set the outcomes wanted and the payment per outcome you are willing to pay and everything else will take care of itself - is an illusion.

As the NAO puts it: 'Commissioners must understand providers' costs in order to create a payment mechanism that offers an incentive to achieve the desired outcomes' rather than other, unwanted or perverse outcomes, or not enough of the outcome.

In a sense, the NAO is arguing that PbR is just another form of buying a service and that the case for using it must be made every time.

However, it notes: 'Not all business cases explain why PbR was chosen: the work programme business case did not make clear why the Department for Work and Pensions (DWP) chose PbR over alternative approaches'.

Local authorities should take note.

Charities and other third sector and smaller providers have had problems in accessing such contracts, limiting the effective market for procurers and shutting out potentially high class organisations from having any chance of winning contracts.

At best, they often end up as sub- contractors to the bigger, often for-profit, prime contractors.

The NAO notes that commissioners need to think about how this works: 'It is not enough for commissioners to understand just those providers with whom they have a direct relationship; they also need to understand how those providers are likely to work with sub-contractors further down the delivery chain'.

Overall the NAO sensibly brings us down from some of the hyperbolic material written about PbR contracts and lets us think about how to use this interesting and sometimes exciting tool to create more good more efficiently in these times of stretched budgets.

We now need to reflect and learn, for as the NAO says, the danger is that: 'Without...evidence, commissioners may be using PbR in circumstances to which it is ill-suited, with a consequent negative impact on value for money'.

And, that is an outcome we surely want to avoid.