Payment by results: can it drive public service transformation?

Ruby was NCVO’s Public Services Manager. She led policy in public service delivery, focussing on health and social care, criminal justice and welfare to work. Ruby has now left NCVO but these posts have been retained for reference.

Today, NCVO has published a report on payment by results (PbR) [PDF, 260KB] and the voluntary sector. It explores the viability of PbR as an effective method for procuring public services, and in particular for harnessing the innovation and service quality which are delivered by the voluntary sector.

For PbR to achieve its transformational potential, commissioners and policy makers must learn from voluntary organisations’ practical experiences with the model. Commissioners need to fully understand the capacity of the market to take on risks involved in PbR before contracts are let, and they need to communicate their procurement intentions early. They also need to use mixed funding models which are appropriate to a diverse range of providers.

A key problem is that a lack of consultation and engagement with providers and service users pre-procurement means that opportunities to address flaws in PbR models, such as perverse incentives which deliver the wrong outcomes, are lost.

If PbR is to succeed in its proposed aims it needs to be more than a procurement transaction. Commissioners need to be building relationships with providers, co-designing payment models and outcomes, and using the learning which comes from this collaboration to inform and improve future commissioning strategies.

NCVO’s interest in PbR

NCVO has been looking closely at PbR for the past couple of years. PbR has the potential to transform and improve outcomes for service users. Yet, we know there are significant challenges in designing PbR models that can actually realise this potential. Also, financial structures are excluding many voluntary organisations from delivering the services which they are best-placed to provide.

To explore some of these concerns, NCVO convened a working group, bringing together voluntary sector providers, solicitors, accountants and financial intermediaries to pool learning about PbR. Today’s report is based on the research and findings of the working group, as well as interviews with voluntary sector providers and commissioners.

The financial implications of PbR for the voluntary sector

The report explores how the financial structures of PbR are shutting out the expertise of many voluntary sector providers. The amount of upfront capital required to set up and sustain services until payment is achieved can be a challenge in a sector where reserves are limited, and the additional risk of non-payment is worrying for charity trustees who have to be prudent with charity funds.

PbR brings additional risks (not least in terms of non-payment). Providers need additional tools for risk assessment and management which might not have been needed in previous contracts. For some providers, particularly smaller organisations, investing in developing these skills – such as financial modelling – might help them with one set of contracts, but be a disproportionate spend in terms of their other activities.

We also know that the ability of providers to accurately assess the risks from a PbR contract can be highly constrained by the quality of the information that is received from commissioners. Our report highlights cases where inconsistent or inadequate data has made it very difficult for providers to work out whether the contract offers sustainable payments for working with their service users.

We have also seen examples of PbR contracts which have not got the fundamental financial model right, resulting in providers struggling to achieve the targets required for payments. This was also a finding of an analysis of PbR contracts we carried out with Bates Wells Braithwaite last year.

How does PbR affect innovation?

The fluidity and collaborative nature of the voluntary sector means it is an important site for the entry and development of service innovation. However, the funding structures of PbR can constrain this innovation. The risks which are introduced through PbR (such as the risk of not being paid) can encourage providers to ‘play safe’ and not take on any additional risks by trying new ways of delivering services.

What is more, PbR favours those providers with the largest turnovers. Yet, a diverse market with providers of all sizes is essential to innovation—it ensures that a wide variety of providers can bring in new ideas and challenge the status quo.

What does PbR mean for personalisation?

For many in the voluntary sector, personalisation – namely service user participation, empowerment and control – is a central to the way that they work with people. Our paper explores the extent to which PbR can deliver more personalised outcomes. We argue that there is an opportunity for this but that service users need to be involved in the design of outcomes.

Payment structures must offer sufficient funds for working with all service users, no matter how complex, sustained, or expensive their needs might be. This would help to guard against practices such as creaming and parking.

What next?

Did we miss anything in our report? Leave a comment below or email us.

To ensure PbR is put to best use, we’re looking to develop a practical guide to commissioning PbR contracts. Do let us know if you’d like to be involved in this work.

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One Response to Payment by results: can it drive public service transformation?

  1. Nigel Rose says:

    As you rightly point out PbR has many problems and personally I doubt that it has useful role in health and welfare contracts especially for services run by value-driven VCS organisations. It’s the wrong incentive.

    When speaking to commissioners about PbR I find that, almost without exception, they fail to understand the statistical nature of PbR, it is a risk model. Because of this lack of understanding they have often failed to appreciate how risk changes as client cohort size changes. This is why small PbR contracts really make no sense.

    The argument that I make to commissioners and which they seem to take on board to some extent, is that they should create a “level playing field” by ensuring equality of risk for large and small organisations, rather than what happened in the work programme, where the risk for smaller sub-contractors was much larger than for the larger ones.