Outcome based contracts Joshua Reddaway, April 2016

National Audit office Introduction

Overview – our role The National Audit Office (NAO) scrutinises public spending for Parliament We help to hold government departments and the bodies we audit to account for how they use public money Our work helps public service managers to improve performance and service delivery, nationally and locally Led by the Comptroller & Auditor General (C&AG) and independent of government

The accountability process

So far this year… Government spending with Small and Medium Enterprises MyCSP eBorders DWP Medical Health Assessments Services Rail Franchising Use of consultants and temporary staff

Outcome based contracts are complex and need to be managed Overview:

Goods and pharmaceuticals Carter Review Crown Commercial Service NHS Commissioning (public to public contracts) Failure regime Incentives Competition Services contracted from the private sector Commercial Capability Contract Management Risk Allocation and incentives Provider Accountability

Outcome based contracts Evolving understanding of contract management Commercial capability

Government’s use of PbR Findings from our work:

Our work  We looked at:  Government’s use of PbR for public service delivery;  Issues commissioners need to think about when deciding whether or not to use PbR;  Challenges in designing PbR schemes; and  How government evaluates the effectiveness of PbR schemes and the PbR mechanism.  We published:  Report on the use of PbR and emerging lessons for government decision-makers  Analytical framework to help decision- makers

Definitions

Why PbR? “It improves accountability” Providers are responsible for delivering outcomes and will not be paid unless those outcomes are achieved “It frees providers to innovate and improve outcomes” Providers can be more responsive to users, drawing on their experience and expertise If commissioners define outcomes, not inputs, providers can innovate to achieve them “You only pay for success” Cost-effective delivery (for the commissioner) Commissioner can transfer financial risks to the provider

Our conclusion  Based on our review of four main uses of PbR in public service delivery, we concluded:  PbR is not suited to all areas of service delivery;  It’s important that commissioners can justify their choice of PbR over another payment mechanism; and  Commissioners need to understand the risks and costs of using PbR so they can ensure they have the capacity to implement it effectively.

Framework contains more detail …

How does it work? Commissioner Provider Service users Outcomes Awards PbR contract to provider Delivers interventions to service users As a result of the provider’s intervention, service users achieve desired outcomes Commissioner monitors progress with outcomes Achievement of outcomes triggers payments

What do you need for it to work well? System Clear objectives that can translate into measurable outcomes Clearly identifiable cohort or population of beneficiaries Sufficient evidence exists about what works to enable providers to estimate costs of delivery Commissioner Data available to set baseline Possible to construct an appropriate counterfactual Outcomes are attributable to provider interventions, rather than other activities Provider Providers exist who are prepared to take the contract price and risk Providers are likely to respond to financial incentives Relatively short gap between provider intervention and evidence of outcome

Key issue: managing risk AimCommissioners establish clear lines of oversight and accountability in PbR contracts and intervention mechanisms to minimise the impact of provider failure on public services. Why does it matter? Commissioners can transfer some risk to providers but retains the reputational risk and cannot truly transfer accountability for service quality and continuity if providers fail. Example questions to ask: Are you clear about which risks will be transferred to providers, and which you will retain as commissioner? As commissioner, do you have mitigating actions in place to manage the risks you retain? (e.g. reputational risks) How will you tackle prolonged underperformance or failure in one or more providers? Are there mechanisms to ensure service continuity is not disrupted by provider underperformance?

Where will providers focus their effort?

Key issue: setting incentives AimCommissioners identify challenging but achievable outcomes on which to base payments, which in turn provide effective incentives for providers Why does it matter? Payments have to be sufficient to ensure: Providers are interested in competing for the contract The contract is financially sustainable for providers Providers are motivated to achieve ‘optimal’ outcomes Example questions to ask: Do you understand who will be involved in delivering services to users? How might providers try to ‘game’ the system? Are providers likely to avoid working with harder to help groups unless those groups attract a higher payment? Do you understand the likely whole-life costs to providers of achieving outcomes? Are there outcomes that are more expensive for providers to achieve? Do you know at what level you need to set payment in order to provide an incentive that positively influences behaviour?

Outcome based contracts Evolving understanding of contract management Commercial capability

Goods and pharmaceuticals Carter Review Crown Commercial Service NHS Commissioning (public to public contracts) Failure regime Incentives Competition Services contracted from the private sector Commercial Capability Contract Management Risk Allocation and incentives Provider Accountability

Government’s commercial capability Findings from our work:

G4S faces criminal probe after overcharging taxpayer millions for electronic tags Chris Grayling, the Justice Secretary asked the Serious Fraud Office to launch a probe after it emerged G4S and rival security firm, Serco, overcharged the government by tens of millions of pounds.. Daily Telegraph, 11 July 2013 G4S faces criminal probe after overcharging taxpayer millions for electronic tags Chris Grayling, the Justice Secretary asked the Serious Fraud Office to launch a probe after it emerged G4S and rival security firm, Serco, overcharged the government by tens of millions of pounds.. Daily Telegraph, 11 July 2013

The government reviews found substantial weaknesses in the way contracts are managed

Deep rooted, cultural, systemic problems with government’s contract management The role of contract management Senior attention to contract management Information about contracts Contracting capability Transforming government’s contract management (Sept 2014)

Organisational capability “The Cabinet Office … should report back …by the end of 2015 on the progress made in implementing reforms across government.” Committee of Public Accounts Transforming contract Management 23rd Report 2014–15

Government commercial function Departmental governance Visibility Ownership Government’s commercial landscape Starting to see changes

Government commercial function Departmental governance Visibility Ownership … but huge challenges Pace and consistency Recruitment and retention Joining up systems Cultural barriers

Evolving understanding of contracting Findings from our work:

From contract management to managing contracts Add recent trends Use of political influence Demand for public transparency Use of open book Reputation management Long-term relationship and government as single customer Client leadership, focus and attention Expert responsibility/Duty of care Evolving requirements SpecBid process Contract management: Service level agreement Relationship management change control

Moving towards a new understanding of managing contracts NAO commercial relationships assessment toolkit (draft)

Outcome based contracts Evolving understanding of contract management Commercial capability

Outcome based contracts Joshua Reddaway, April 2016