Payment By Results

A ‘normal’ service contract has the service provider simply providing services in exchange for payment.  If the service provider carries out the services required, to the standard required, then it is entitled to payment.

A PBR contract looks less to the services themselves (the outputs) and more to the reason why the services are being commissioned in the first place (the outcomes), sometimes with a ‘bonus’ payment to what would have been paid otherwise.  The ‘bonus’ reflects part of the saving to the public purse brought about by the services.  The commissioner keeps some and shares the rest with those who have brought about the savings.

So far so good, and with public expenditure understandably under greater scrutiny, who wants the public purse paying for services that don’t actually do what they are supposed to?

PBR contracts are seen by some, though, as a “win/win” for commissioners and a “lose/lose” for providers.  Only if the provider achieves its outcomes does it get paid.  Whilst this might wheedle out those providing sub-standard services, it does create two immediate issues.  First, how does the provider cover its costs in the period between the service provision starting and the results being known?  Second, what if the provider achieves some useful things but falls short of the targets actually set?

The first is an issue of cashflow.  Unless the provider has particularly deep pockets, this is a real issue for PBR based contracts.  Two solutions present themselves – one is staged payments with a balancing-up process at the end.  This is fine if the outcomes have been achieved but clearly a problem if the provider has to pay back that which has already been spent.  The second solution is sometimes referred to as “social impact bonds” (SIBs).

Here, a third party funder becomes involved, whether a social lender like Big Issue Invest or another source of funding such as banks or Community Development Finance Institutions.  The funder funds the service provider and shares the ‘bonus’ of successful outcomes with the commissioner of services and perhaps also with the provider (depending on the terms of the deal).  The Ministry of Justice is taking the lead with this of kind of thing - the Peterborough SIB has been well documented and others are proposed.

The second area – the definition of the outcomes - is crucial.  If the bar is set too low, then it arguably defeats the point of the whole exercise; if it is too high, then it makes life virtually impossible for the provider.  It is vital that those setting the outcomes in the contracts both understand the sector in which the services are to be provided and are not too “greedy” in what they seek to achieve.

A related criticism of PBR is that providers will “cherry pick” those easiest to help, leaving the most needy completely excluded from vital support.  This certainly needs to be addressed if, as seems likely, PBR will become more prevalent.

One approach would be to exclude the most needy from PBR altogether and fund these services through the more traditional routes instead (though of course, there would need to be a cut-off point, which would could well prove controversial).

Another approach is for PBR contracts to be weighted so that there is a greater incentive for helping those with the most complex needs.  A third option would be – within the same contract – to have elements which are PBR and elements which are traditional payments for services provided.

Finally, PBR contracts could include payments for certain milestones even if the ultimate target is missed.  For instance, a part payment for finding someone housing, for helping them break a drug or alcohol habit, or finding someone work, are each valuable things which save money in public interventions even if the ultimate target, which might be avoiding being arrested, is missed.

Certainly, there is much work to be done if PBR is to become a more common way of contracting. Of course, it is important that PBR doesn’t become a way of over-burdening an already stretched sector, or of letting those with the most complex needs slip from view.  But it is equally important to recognise that we will not for the foreseeable future return to pre-recession models of funding service delivery, and we must be realistic about the limitations of the public purse.

However, for those providers who are confident in their knowledge of those they work with and confident in their approach for meeting needs, perhaps it is time to take the metaphorical bull by the horns and engage commissioners in discussions about how PBR contracts – appropriately shaped and drafted in key areas such as outcomes – might well be useful to all.  Surely it’s better for the sector to come to the table voluntarily to help forge realistic solutions to our shared problems, rather than be forced to comply later on.

Shivaji Shiva is a senior associate at Anthony Collins Solicitors.