PbR definitely focuses providers' efforts on achieving the outcomes specified in a contract. There are many examples of PbR schemes where outcomes are achieved, and even more where they are not. If your priority is to improve outcomes, you need to ensure there is sufficient funding and that the outcomes you specify are within providers’ control – for example lack of available accommodation can cause the failure of a prisoner resettlement scheme. A final note of caution: most providers will de-prioritise all activity that is not related to an outcome measure with associated payment. Click here for more detail.

If a PbR scheme achieves its outcomes, typically it will represent good value for money since, e.g., a homeless person in sustainable housing makes a much reduced demand on public services. However, the research evidence warns against using PbR solely or predominantly for cost-cutting for 3 main reasons: it encourages “gaming” with bidders over-promising and subsequently under-delivering; tends to drive down quality and, consequently, performance; and encourages providers to respond to under-priced contracts by “creaming” (focusing on the easiest to help) and “parking” (providing a minimal service) to those with more complex needs. The research recommends that when a service is commissioned on a PbR basis for the first time, fixed-price competition based entirely on quality is likely to be more appropriate. Click here for more detail.

PbR has the potential to stimulate innovative approaches to entrenched social problems. Commissioners may stipulate the outcomes they desire and then wait to see whether providers deliver, safe in the knowledge that if they fail, commissioners need not pay. However, although there are examples of PbR-generated innovation, to date, these have been infrequent. This appears to be because providers (and investors) tend to be risk averse when payment is conditional on performance and are more likely to rely on tried and tested approaches. The evidence base suggests that commissioners looking for innovation should incentivise new approaches by more generous payment levels. Click here for more detail.

PbR enables commissioners to transfer practical and financial risk to providers; by linking payment to defined results, commissioners ensure they do not pay for poor performance. Providers are also often expected to cover early start-up and running costs until payments for success reimburse this outlay. However, it is clear that commissioners cannot fully transfer risk; they retain responsibility for local citizens receiving a good quality and effective service – they must also be careful to ensure that PbR contracts are not too generous and waste public money. The evidence suggests that the primary purpose of transferring risk should be to sharpen performance incentives for providers, not for commissioners to offload their responsibilities. Commissioners are urged always to pilot new PbR schemes. Click here for more detail.

There are a number of examples of PbR being used to open up an existing market to new providers. There is a mixed experience of this working in the UK with examples of some tender processes being cancelled because potential new providers did not wish to bid for under-priced contracts. Where contracts are large and pricing is tight, only very large providers tend to bid which may reduce the range of expertise (particularly local knowledge) available. Commissioners should take time to understand their provider markets and providers’ appetite for risk before deciding to use a PbR approach. Click here for more detail.

PbR can result in a reduced role for commissioners who stipulate outcomes and allow providers to seek to meet them in any way they see fit. Since payment is dependent on outcomes, commissioners should be able to reduce the time & resources they invest in performance and contract management. However, there is considerable evidence to suggest that the amount of initial work required of commissioners in designing outcomes and the mechanisms for measuring and verifying them can be substantial. If commissioners are prepared to adopt a “hands-off” approach to performance management, in addition to the saving of commissioner resources, providers will be able to focus more time and effort on achieving outcomes and less on reporting to commissioners. Click here for more detail.

Because PbR can specify tightly defined outcomes for specific groups (“segmentation”), commissioners can design contracts in a way that attempts to reduce existing inequalities – for instance incentivising providers who succeed in raising the outcomes for minority groups to the same level as mainstream service users. Commissioners should certainly be aware that a frequent unintended consequence of introducing PbR is that the most vulnerable/hard to help service users can become neglected as they are typically less profitable for providers. Incentivising providers to target such groups is an excellent approach to mitigate this sort of “gaming” behaviour. Click here for more detail.