Payment by Results may be simple and seductive in theory, but it is devilishly complex in detail. The model requires further evolution if it is to drive innovation rather than undermine it
Payment by Results (PbR) is a flagship policy of the government’s Open Public Services agenda and is seen as a key tool for reform. The concept is simple and seductive. Providers are paid for the outcomes they achieve, not the activities they undertake. Originally developed by New Labour, the use of PbR in public service markets has grown considerably in recent years.
It’s not hard to see why the idea has taken hold. The rhetoric of improved efficiency, increased transparency and reduced risk to the taxpayer is appealing to politicians and commissioners alike.
PbR’s transformative potential is assumed to stem from two particular elements: the transfer of risk to providers to drive performance and the freedom for providers to shape services without specification. Yet there is a key tension here. The potential to take risks in service design is constrained by the risks involved in ‘failure’.
As the PbR brand gains momentum, this inherent tension is straining under the weight of implementation. Both centrally and locally, PbR models are being designed in ways that fail to fulfil the imagined potential. Meanwhile, financial structures are excluding many voluntary organisations from delivering the specialist services they are best placed to provide.
Without significant interventions, a mechanism intended to drive innovation in public services may instead be undermining it.
To help policy makers and commissioners avoid PbR pitfalls, the National Council for Voluntary Organisations has published a report today that draws on practical experience of the model. It builds on the research and findings of a working group the NCVO convened, bringing together voluntary sector providers, legal advisors, accountants and financial intermediaries.
We suggest that commissioners make sure they fully understand the capacity of the market to bear the risk of PbR before contracts are let. We also recommend the use of mixed funding models, which are appropriate to a more diverse range of providers. An example would be up-front and progression payments to ease cash-flow barriers and facilitate working with users who are further from end outcomes.
It is essential that service commissioners engage with providers and service users pre-procurement, so that flaws such as perverse incentives that deliver the wrong outcomes can be identified. The government also needs to take responsibility for ensuring coordinated evaluation of different PbR models and sharing learning about its appropriate use.
While it may be simple and seductive in theory, PbR is devilishly complex in detail. A procurement transaction alone cannot be a panacea for public service transformation. To be successful with PbR, commissioners need also to be nurturing broader relationships with providers and users in their locality – to identify need, design outcomes and payment mechanisms, and inform future delivery.
Few quibble with the principle of PbR – NCVO included – but it requires much further evolution in practice before we can hope to see the innovation and personalisation of services it could deliver.
Ruby Casey-Knight is public services manager at the National Council for Voluntary Organisations
