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Payment by results – a route to social policy innovation in nervous, cash-strapped times

19 February 2013
Toby Eccles in conversation with Jack O’Sullivan

Toby Eccles, Development Director at Social Finance, was speaking to Jack O’Sullivan following his keynote presentation at the PIRU event, ‘Payment-for-performance: incentivising quality in public services,’ on 19 February 2013 at LSHTM.


How do we make a real impact on big social challenges such as ageing, crime and youth employment when people with the cash are nervous about risking fresh approaches?

Payment By Results (PBR) could be an answer but we have a lot to learn to make it work really well, according to Toby Eccles who is Development Director of Social Finance and one of the pioneers of PBR.

PBR is, he says, a clever system - paying just for what is actually achieved. So the payment might be for getting more people in jobs. It could be for cutting numbers of diabetics coming back into acute services. ‘No results, no payment’ appeals to those wary of spending scarce public money in novel ways.
He explains: ‘At Social Finance, we design new ways to support social change, helping cash to flow in that direction. We aim to help the people with the vision and the expertise to get the job done. That’s what our Social Impact Bond is all about. It’s a deal between innovative providers and the Government. The providers promise to deliver key outcomes and, in return, once they deliver, the Government pays up. But, crucially, it is all underwritten by investors – purchasers of the Social Impact Bond – who have faith in the providers’ claims. So they stump up the cash initially to get the job done, expecting to be reimbursed by the Government if everything goes according to plan. So the Government avoids risk, allowing greater imagination, the visionaries can put new ideas into action and, on the ground, we see real, positive change.’

Peterborough is good example of the style of programme envisaged. Social Finance has brought together a partnership investing in a £5m Social Impact Bond to cut re-offending. The providers, mainly from the Third Sector, are supporting prisoners in and out of jail. The investors’ return from the Government will depend on the providers’ success. They could, notionally, lose their shirts. But, if betting on the providers proves smart, everyone wins, with less crime, fewer prisoners and a more enlightened policy.

This template is producing programmes that are being tried across the public sector, says Mr Eccles, aimed, for example, at improving educational outcomes, reducing numbers of children in care, reducing substance abuse and numbers of rough sleepers. ‘Once the NHS changes settle down, there will be opportunities in health as well. PBR could help tackle healthcare’s perennial problem – providing incentives to shift services from acute hospitals and create a more community-based model.’

He argues for pragmatism when approaching discussion about PBR: ‘Let’s test it out, stick with what works, learn from what doesn’t. The naysayers will find lots of reasons to stifle change – the risks of perverse incentives, the variability in public services that may emerge, warnings that the private sector is replacing public provision. But they are in danger of forgetting the perverse incentives and variability in the present system. We can improve the incentives. In a world of complex needs, it is healthy for public services to vary. And, if the private sector is winning out unfairly, let’s check the commissioning process so there is a level playing field and healthy competition to achieve the best results.’

Mr Eccles accepts that there are problems with PBR: ‘The compulsion for revolution rather than evolution, and poor contracting and procurement practice have, in the work programme, combined to create an ineffective fledgling industry. There is fear that mistakes will be repeated rather than learned from. We need - particularly those in government - to learn from the initial experiences of PBR.

He has developed a list of things to avoid: ‘First, don’t set the maximum outcome payment at or below the value of the previous revenue contract. If you do, providers will be nervously trying to retain revenue, rather than innovating to improve outcomes. Second, don’t set outcome measures and values without engaging the marketplace. Measures take a while to achieve buy-in and - to motivate change - they need it.

‘Thirdly, don’t run a price-focused rather than a quality-focused procurement process. It favours naive or optimistic bidders over competent ones. Fourth, don’t transfer risks that the bidder is in no position to control. It may make you feel better, but it increases cost disproportionately, or ensures you only get naïve bidders through who haven’t thought about it.

‘Fifth, avoid giving detailed information only after bidders have been asked their price, and then offering them only two options: to continue or withdraw. This is simply a way of ensuring poor services by desperate bidders. Sixth, don’t try to control interventions, inputs and processes as well as outcomes. It’s tempting, but not leaving room for innovation takes away much of the point of PBR.

‘Seventh, don’t aim to maximize the proportion on outcomes. The right balance of outcomes payments and service payments should be thought through, not decided on principle. Lastly don’t do it all at once. Test or learn by staggering your start across different sites - doing everything when you know least is simply irrational.’


Finally, Mr Eccles outlines some positive lessons to learn from experience of PBR so far: ‘First,’ he argues, ‘have a way to alter prices over time to allow for learning. For example, you could have a maximum and minimum outcomes pot that would be distributed to providers according to level of outcomes achieved. This would still reward quality and improvement but would limit downside and upside risk.

‘Finally, manage your market aggressively. If you are creating a new market, you should decide what you are looking for and create it. I would intentionally create a mixed economy, reserving some slots for, say, mutuals or social enterprises. It is vital to ensure diversity, avoid oligopoly and maximise learning and innovation.’