Payment by results – lessons from the literature

19 Feb 16

Commissioning on a payment by results basis seems appealing when budgets are tight, but is it really a beneficial approach?

Payment by results is an increasingly common commissioning model, growing in popularity all over the world. In 2015, the National Audit Office identified 52 schemes containing an element of PbR in the UK, worth a total of £15bn of public money.

The association of many PbR schemes with very robust cost-cutting as well as the privatisation of previously public markets has caused considerable controversy and confusion. This has even enabled researchers working from the same data to reach opposing conclusions about the same initiative.

By way of illustration, those who saw the Work Programme as being primarily about helping long term unemployed people back to work with the least investment of public finances will assess it as very successful — the Work Programme performed at the same level as the programmes preceding it, but was £41m (2%) cheaper. Conversely, those who thought it was designed to get people with entrenched difficulties such as disability or addiction into work, will conclude that it has failed.

There has also been widespread criticism of the growth in PbR despite the lack of an evidence base to guide whether and in what circumstances it can be effective.

 

Lessons from the literature

I’m currently developing 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 – more details are available through my website. The project is funded by the Oak Foundation, an international charitable trust that aims to address issues of social and environmental concern, particularly those that have a major impact on the lives of the disadvantaged.

As part of the project, I’ve just completed a review of the PbR literature, examining nearly one hundred research studies.

 

Does PbR work?

One of the main findings was that PbR schemes are so varied, tend to be commissioned for such different reasons (to improve outcomes, to stimulate innovation, to reduce costs, to transfer risk or to encourage new markets), and are so often poorly evaluated, that it is not yet possible to pass judgement on whether the PbR model is inherently good or bad.

There are a number of examples of positive PbR schemes in the UK and other countries. There are, probably, even more examples of badly designed PbR schemes that have failed.

Nonetheless, the rapid proliferation of PbR schemes has helped to generate useful knowledge for those involved in their commissioning, delivery or evaluation. There are clear lessons at each of the four key stages of: understanding the market; defining outcomes, setting price and incentives; and monitoring and evaluation.

 

Understanding the market

• When considering introducing a payment by results approach, commissioners should ensure that they align the level of risk they wish to transfer with the “risk appetite” of current and potential providers.

• Commissioners should be aware that large contracts will attract primarily large providers and they will need to proactively prescribe any requirement that small, medium or local providers are to be involved in service delivery.

• It is extremely risky to procure a PbR service for the first time on a competitive pricing basis.

• There are many benefits in co-designing new PbR contracts with potential providers and service users.

 

Defining outcomes

• Outcome measures should be both clear and meaningful to providers.

• Where possible, outcome measures should be simple although straightforward measures are not always appropriate in schemes where service users have complex needs and outcomes may take several years to achieve.

• Measures should always take into account deadweight to ensure that any PbR contract results in improved performance.

• Wherever possible, outcome achievements should be verified by existing monitoring systems which are neither overly onerous nor expensive to operate.

• Commissioners need to decide how important the attribution of outcomes is and to ensure that there is an equitable system for paying for results when several providers are involved.

• As much as possible, outcomes should reflect the behaviour of providers and not external factors (such as changes in the (un)employment rate).

• Both individual and cohort outcome measures can be valid; where cohorts are used, they must be sufficiently large for results to be meaningful.

• For many services, segmentation of the target group will be vital to avoid the “parking” of less profitable service users.

 

Prices and incentives

• The price and incentives structure will determine the form and quality of any PbR-contracted service. Gaming is to be expected and can be managed by segmentation with higher incentives where required and differential pricing.

• The dangers of competitive pricing are well-established and commissioners should be aware that they retain overall responsibility and cannot transfer all risk to providers.

• Reinvestment can be a powerful incentive associated with continuous improvement in quality outcomes.

• Commissioners should pay careful attention to the length of contract and, in particular, the delay between the delivery of service and payments for results.

 

Monitoring and evaluation

The monitoring and evaluation of PbR schemes should, typically, be ‘light touch’ with the emphasis on verifying whether providers have achieved specified outcome measures. However, some form of quality assurance, ideally involving the views of the end-users, may be important as insurance against vigorous gaming practices.

 

Implications

Perhaps the most important implication from the research is that unexpected, often perverse, consequences are commonplace as providers focus wholeheartedly on these measures in a manner which is either described as “rational and efficient” or “gaming the system”. Irrespective of their perspective on this issue, many commentators recommend:

• Piloting new initiatives and avoiding hasty implementation;

• Flexibility, modifying contracts in the light of provider behaviour;

• The value of mixed models with not all income linked to the achievement of outcome measures.

Developing a new PbR service is likely to be a process of trial and error; it is unreasonable to expect to get the contract right first time and good practice to build in the potential for constant adaptation.

 

Download the full literature review

  • Russell Webster

    Russell Webster is a researcher and consultant with a specialist interest in payment by results, drugs and crime; he maintains an extensive Payment by Results Resource Pack which brings together research, news, views and analysis of PbR and is free to browse and dowload

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