Payment by Results: what commissioners need to do next

Transcription

1 Payment by Results: what commissioners need to do next

2 Payment by Results: what commissioners need to do next This paper will be of interest to board-level commissioners of leaders, or as the leaders of major programmes. It sets out EY s experience of working on major public service a range of discussions with a diverse group of providers. Our view is that commissioners have so far struggled to understand mechanisms. Only when commissioners do so, and prepare themselves accordingly, will they be able to achieve maximum value for money. Is Payment by Results the answer to public service reform? procurement that looks set to stay. There are compelling economic public services by expanding the scope for alternative providers private sector response, especially towards solving the more challenging social problems. Ongoing spending constraints in the Over the last parliament, EY has worked with a number of the programmes that have been leading on the latest developments commissioning and provider side and always at the commercial interface where services are priced and risks assessed. Over time, we have become convinced that commissioners will only extract providers to solve progressively major social problems and deliver better value for society. Commissioners have the opportunity, that potential. This summary document sets out the major conclusions of our discussions and our perspective on what it will take to move the focus away from theoretical concepts to a the ground. It is only through achieving a greater degree sides face in its successful delivery, that its full value will be unlocked. What is Payment by Results? an outcome for which the means of delivery of the outcome is programme, such as getting individuals into paid employment for a sustained period, is that the most effective way for a provider to deliver the target outcome is essentially not known. If the provider outperforms the target outcome, it receives an upside return; if the outcome is not achieved, the provider may not be paid at all. to revolutionise public services, improve outcomes and drive innovation. We would like to thank all those who took part in these discussions and who shared their perspectives and experiences. 1 Payment by Results: what commissioners need to do next

3 elements for achieving outcomes. For example, in probation, there is a fee for delivering the order of the court, such as getting an individual to attend a drug rehabilitation programme, and the rest of the fee is outcome-based, driven by the individual not subsequently reoffending within a given time period. outcomes rather than outputs and that the optimum means of delivery is not known: Commissioners will seek to draw in as many different delivery methods and new ideas as possible to achieve the outcome, rather than just expecting providers to focus their resources on what they already know works in order to maximise their economies of scale. Commissioners will want to spread their contracts across a larger number of prime providers, who operate more diverse supply chains with larger numbers of smallerscale participants, rather than procuring at scale from a small number of providers who, in turn, operate streamlined supply chains. The necessary consequence of these commissioning objectives is that there will typically be a premium to cover both risk transfer and the higher management costs associated with a larger and more complex supply chain. of provision of public sector outputs. That is the role of the element of the procurement is likely to carry a cost premium to the commissioner. Commissioners must also establish a practical limit to the additional outcomes that they are prepared to pay for and above which additional outcomes become unaffordable. In practice, this means that: Why will the scope of PbR as a commercial incentive structure continue to be extended? players to improve outcomes in some of the most costly and stubbornly intractable social problems, such as prisoner rehabilitation, youth unemployment and support to troubled families with complex needs. There is much greater emphasis now on what brings genuine and sustainable value for money, through a combination of realised cost savings and better service outcomes, with providers capital at risk if they do not deliver. thought to offer a clear incentive for providers to innovate. This is only earned if they deliver an improved outcome, such as a in these areas by offering a higher return for a better outcome; the more the provider is prepared to invest, the better the return it can generate. for less cost; at worst, the risks and costs of failure are borne by the private sector. In government circles, this is a powerful vulnerable victims of crime against repeat victimisation, to turning the tide against obesity, there is no shortage of long-standing problems that demand a commissioning strategy that can foster innovation and apply it at scale. Output-based savings from the procurement must more current spend, thus always delivering more for less. is reduced accordingly, so the commissioner should at least be paying less than the current spend, even if the programme outcomes are not achieved. Payment by Results: what commissioners need to do next 2

4 more commonly adopted: cannot price the risk. This inherently limits the accept in any given programme to resolve previously unsolved problems. there is: More uncertainty about what public services will actually cost. Less control because the public sector needs to transfer more responsibility. More complex balancing of risk, innovation and sustainability what works. enhanced commissioning capability to manage more diverse and extended supply chains. more complex analytics to frame and transfer and the greater complexity of the supply chain, which has to be paid for by savings elsewhere; in principle, commissioners could make the case to pay more to get more but we do not see business cases like this happening in practice, and especially not in an environment of continued cost-cutting. Listening to providers between public and private sector delivery. Our approach here has been instead to identify practical insights for commissioners by comparing our own observations with provider community. We have talked to a representative sample of providers, covering both existing and new programmes and a range of organisational capabilities, from prime contractors to some of the smallest members of the voluntary and charitable sectors. We have found that there is a broad willingness among providers useful payment mechanism for commissioners. It is also seen as a powerful component of public service reform and we would expect its use to continue to be applied more widely. with what we believe are some of the fundamental drivers of failure or success: 1. Providers have to balance cost recovery, upside returns from successful innovation and risk pricing. There is unease that commissioners have not really grasped that a key are incentivised to bid and then innovate by the prospect of accept in principle that there has to be a reasonable transfer upside reward should drive a more extensive and thorough search for and delivery of innovation by providers. Conversely, providers tell us that there is often a disconnect in practice because the carrot of more upside reward neither makes the contract inherently more attractive nor automatically leads to more innovation. Innovation still has to be costed and the overarching priority for private sector providers is to recover their costs. 3 Payment by Results: what commissioners need to do next

5 appetite for risk; if they are unsure that full cost recovery is possible, they will probably not bid for the contract or will providers, no amount of upside reward will be able to offset the disproportionate downside risk, where a lack of understanding of the upside drivers may equally lead to a failure to achieve must better understand how the private sector prices and manages risk. 3. PbR mechanisms are far more complex to calibrate than conventional payment mechanisms. simple in theory and highly complex in practice. It requires ensure that it is delivering in the way that was intended. not deliver against their policy objectives; if they get it right, standing social problems. Commissioners therefore need to steward their programmes over 2. Increased provider adoption of PbR should not be misconstrued as the private sector enthusiastically embraces the concept. In our view, increased adoption tenders is the price of entry for participating in government contracts, rather than a route that offers superior returns to shareholders. This may deter providers who ought to bid and also attract providers who should not so commissioners need to avoid setting up procurements that lead to this outcome. For commissioners, this has important implications for what how they will think about pricing their bids. Payment by Results: what commissioners need to do next 4

6 Next steps Commissioners need to understand the provider market when regime, how to commission those programmes and how to sustain Further papers in this series contain our insights and guidance on the attitudes of providers and practical advice covering these issues, focusing on: the time they were expressed. This publication contains information in summary and is therefore intended for general guidance only. It is not intended to be a substitute for loss occasioned to any person acting or refraining from action as a result of any material in this publication. Contact us Matthew Watt Partner mwatt1@uk.ey.com James Eliot Executive Director jeliot@uk.ey.com 5 Payment by Results: what commissioners need to do next

7 Payment by Results: what commissioners need to do next 6

8 EY About EY EY is a global leader in assurance, tax, transaction and advisory services. in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. ED None In line with EY s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be from any action taken or not taken by anyone using this material.