Spending watchdog expresses concern at payment by results schemes

The National Audit Office has expressed concern at the use of outcome-based payment schemes, warning that they are “hard to get right, and are risky and costly for commissioners”.

In a report, Outcome-based payment schemes: government’s use of payment by results, the spending watchdog said credible evidence for the claimed benefits of payment by results (PbR) was now needed.

The NAO estimated that the Government’s PbR schemes now account for at least £15 bn of public spending.

But it claimed that neither the Cabinet Office nor the Treasury currently monitored how PbR was operating across government.

In compiling its report the watchdog examined the use of such schemes in areas such as welfare to work, family support, offender rehabilitation, and international aid.

The NAO said: “Without a central repository of knowledge and a strong evidence base to refer to, PbR schemes may be poorly designed and implemented and commissioners are in danger of ‘reinventing the wheel’ for each new scheme. If PbR is used inappropriately or is executed badly, the credibility of a potentially valuable mechanism may be undermined.”

The report’s key findings were:

• PbR was not suited to all public services. The nature of PbR meant it was most likely to succeed if the operating environment had certain features, “for example results that can be measured and attributed to providers’ interventions”.
• Commissioners should justify their selection of PbR over alternative delivery mechanisms.
• PbR is a technically challenging form of contracting, and has attendant costs and risks that government has often underestimated. In the rush to implement, government has launched some PbR schemes without making best use of pilots to test the planned approach.
• To get scheme design right commissioners need to understand potential providers’ capacity to take on risk. They must also be aware of the risks they retain.
• It takes time and effort to design the payment mechanism so it offers appropriate incentives to providers. “If the payment offered is too high, the taxpayer could pay too much for the service; if too low, providers may not bid for the contract. A poorly designed scheme may create perverse incentives which lead providers to prioritise people who are easier to help and neglect those who are harder to help.”
• It is essential that commissioners establish performance expectations at the start of a scheme, taking into account baseline performance and non‑intervention rates.
• Commissioners need to actively monitor and manage provider performance.
• Commissioners need to plan at the outset how they will evaluate both the effectiveness of the scheme as a whole, and the impact of PbR as a delivery mechanism.

The NAO’s recommendations include that the Cabinet Office and Treasury identify a part of the government to be the repository of information and expertise about public sector use of PbR.

The watchdog has also published a PbR analytical framework. This sets out questions for commissioners that are intended to help them decide when to use PbR, and design and implement PbR schemes.

Amyas Morse, head of the National Audit Office, said: “Payment by Results potentially offers benefits such as innovative solutions to intractable problems. If it can deliver these benefits, then the increased risk and cost may be justified, but this requires credible evidence.

“Without such evidence, commissioners may be using this mechanism in circumstances to which it is ill-suited, to the detriment of value for money.”