Getting Payment by Outcome (PbO) contracting right Health Industry Group BULLETIN 4 • 26 JUNE 2015 HEALTH INDUSTRY GROUP BULLETIN 1 An ongoing challenge for government is to balance the budget (from the short to long-term) while managing the mounting demand for service delivery. Much discussion has been had and continues to be had, on how best to address this challenge, with the increased outsourcing of social and health services just one recognized consequence. The ever restricted resources of government means the search for new or innovative ways to deliver social and health services in an improved and effective manner. Overview HEALTH INDUSTRY GROUP BULLETIN 2 PRESSURES ON HEALTH SERVICE DELIVERY Adopting a ‘business as usual’ approach is being recognised as unsustainable and was central to reports by both the Queensland Commission of Audit (2012) and National Commission of Audit (2014). As Doug McTaggart from the Queensland Public Service Commission points out in a public reform bulletin in March this year, ‘fiscal repair’ otherwise known as cost-cutting, is not true reform. The costs will remain or re-emerge over time and potentially increase, resulting in under-funded services unable to meet demand – and a repeat of the cycle. True reform is needed. As governments of all persuasions, at both the state and federal level, slowly move from being ‘doers’ to ‘facilitators’ two critical factors will underpin the success of this shift: a) the public sector’s ability to understand or ‘know’ the customer and b) the public sector’s ability to define the required outcomes. Neither has proved to be the strong point of the public sector to date. Thought needs to go into exactly what the customer or taxpayer wants: as consumers of social and health care services increasingly demand a personalised service outcome. Knowing and properly identifying the service outcome and then enabling the private sector, in innovative ways, to deliver the service outcome is key. This requires a different and advanced form of procurement and contract management, one less focussed on prescriptively specified tender input and methodology (an approach that stifles any creativity or innovation) – to one which identifies the desired outcome and leaves the selected service provider free to choose the method of delivery. HEALTH INDUSTRY GROUP BULLETIN 3 PbO – WHAT ARE WE TALKING ABOUT? Payment-by-outcomes (PbO), while relatively new is increasingly replacing the previous approach to commissioning service delivery outcomes. In general terms, PbO is a procurement model which measures outcomes as opposed to activities. In its strictest application, PbO means no outcome = no payment. That is, governments only pay when agreed (and independently verified) outcomes are achieved. In theory then, government no longer pays for ineffective services, taxpayers receive better value for money and more the risk is transferred onto service providers. However, pure PbO is rarely adopted, with recent examples being a hybrid of traditional input-output based commissioning with some PbO contracting incorporated. INPUT OR OUTPUT BASED FUNDING MIXED PBO AND OUTPUT FUNDING FINANCED PBO Customer bears risk of service achieving objectives Customer and service provider share risk of service achieving objectives Service provider and investor share risk of service achieving objectives Customers only risk is opportunity cost of alternative program not pursued Figure: Hybrid PbO models. PbO is a procurement model which measures outcomes as opposed to activities. In its strictest application, PbO means no outcome = no payment. HEALTH INDUSTRY GROUP BULLETIN 4 GLOBAL ADOPTION Governments in the UK, US, Canada and Australia have begun trialling various PbO models across a wide range of social services, from employment to criminal justice to health services and the provision of social housing. Payment by Results (as it is known in the UK) has formed a central part of the Government’s approach to public service reform over the past four years, particularly in England. Closer to home, the Labor Queensland Government is seeking new ways to approach the complex challenge of service delivery in an environment of increasing demand and diminishing resources. The previous LNP Government launched a ‘contestability’ framework as a result of, and in response to, the Commission of Audit report in 2012. The Harper Competition Policy Review also clearly advocates a move in this direction: “the Panel favours a focus on outcomes rather than outputs in government procurements.” The key benefits of PbO include: Innovation is encouraged Improved effectiveness and efficiency is achieved Greater flexibility is given to service providers Enhanced outcomes for consumers is the primary focus Verifiable and verified outcomes are required to trigger payments PbO VARIATIONS PbO is not in itself a constricted contract model, there are a wide variety of arrangements in use as the very nature of customising service delivery means no single approach can be developed and emulated. Any number and nature of incentives can and are built in to contracts to ensure providers show evidence of outcomes achieved. In some cases the PbO model extends to the use of social finance, such as through the use of Social Impact Bonds (SIBs), where social investors fund service providers. There are an increasing number of private sector participants (equity investors and financiers) interested in pursuing an entrepreneurial approach to addressing social issues. The SIBs that have resulted have already been tested and are producing measurable results. As widely reported last year, Australia’s first SIB, the $7m bond issued to fund UnitingCare Burnside’s New Parent and Infant Network program, produced a healthy return to investors of 7.5% in its first full year. The NSW Government continues to be at the forefront of the use of SIBs with the launch of its Social Impact Investment Policy earlier this year, supported by its Social Impact Investment Principles and the very recent launch of the Expert Advice Exchange. HEALTH INDUSTRY GROUP BULLETIN 5 WHAT ARE THE CHALLENGES? If one of the main benefits of PbO is increased flexibility and innovation in service delivery then the question must be asked – how is this to be achieved? What do we mean by flexibility? What do we mean by innovation? Existing contracting models for outsourced service provision have historically contained prescriptive methodologies for measurement and Key Performance Indicators (KPIs) that demonstrate certain activities along the delivery continuum, without specifying the desired or actual outcome. Various hybrid forms of procurement are already occurring and some may be being referred to or thought of as producing PbOs when in fact they are not. The challenge for the sector, both funders (government, investors and financiers) and service providers is in identifying these desired outcomes with sufficient detail and clarity and also reformulating KPIs so that they actually describe those outcomes in a measurable or verifiable manner. By way of example: a service funded to provide ongoing care and monitoring of patients post hospital release (injury rehabilitation/post-natal/ mental health) may have KPIs detailing regular and prescribed visits, calls to patients and other monitoring over a set period of time or at a time determined no longer necessary following clinical assessment back-to-work programs for the long-term unemployed adopted by the Queensland Government in the late 1990’s and early 2000s were relatively easy to measure and prove: a certain number of unemployed persons achieve gainful employment at the completion of a 6-month retraining program funded by the government and delivered by a non-government service provider. These are not true PbO models. A PbO model of delivery would require clinical assessment (evidence) of a patient demonstrating their full recovery and proving that care is no longer required, (outcome) before payment is made to the service provider. The frequency of care provided and how that care is provided to the individual patient is determined entirely by the service provider. The challenge for the sector, both funders and service providers, is in identifying desired outcomes with sufficient detail and clarity and also reformulating KPIs so that they actually describe those outcomes in a measurable or verifiable manner. HEALTH INDUSTRY GROUP BULLETIN 6 COLLABORATION AND COMMUNICATION ESSENTIAL Crucial to achieving such an outcome (and indeed to all PbOs) is collaboration, between agencies and between government, investors, financiers and the service provider. PbOs require all parties to ‘design’ the outcomes and the contractual regime so they are fit for purpose and there is ownership of outcomes. Clear articulation of the issues being addressed and a common understanding of required and desired outcomes is fundamental to the success of a PbO contract. ‘Reduced recidivism’ in relation to prisoner rehabilitation or ‘decreased hospital presentations’ of mental health patients under home care are potentially too broad when considering PbO outcomes. Then there are the ‘incentives’ to be considered, another aspect of PbO that makes it what is or can be. Is government in a position to offer real incentives? What are appropriate incentives? Is there a risk then, as critics of PbO have claimed, of service providers lying or exaggerating results in order to cash in? Finally, are service providers properly established and resourced to meet the requirements and achieve the outcomes set? Service providers who are not-for-profit organisations, are not generally exposed to the commercial drivers of investors and financiers and do not typically have the internal resources and experience to properly understand and manage the risks in these models. Support is needed! The Queensland Government is as familiar with Public Private Partnerships (PPPs) as any government. However, that experience will not go far in the consideration of PbO procurement. Unlike toll roads and tunnels, PbO introduces the human factor – the customer. What the customer needs and wants is considerably more difficult to define when considering human services and social outcomes and the procurement and contracting process requires careful consideration of individualised and customised outcomes. HEALTH INDUSTRY GROUP BULLETIN 7 KEY CONSIDERATIONS IN PBO CONTRACT ADMINISTRATION The need for a seamless handover from negotiation to implementation A clear understanding of the contract structure The need for effective systems (administration, information and data management etc) Enabling collaboration through proper information exchange The establishment of a clear responsibility matrix within the contract Improved due diligence, particularly on the legislative framework and the legacy systems and programs Engagement of stakeholders through the process – ongoing reporting structures and feedback needing to be captured and actioned Supporting a culture of continuous improvement Robust financial reporting Risk mitigation strategies – reduced control over the ‘how’ service is delivered increases the risk to both funder and service provider PbO SUCCESS HINGES ON CLARITY One criticism of PbO is that it favours larger organisations or those that can operate viably while awaiting payment at the conclusion of a program. Smaller organisations without sufficient cash-flow may be hampered by PbO payment arrangements, however, this does not necessarily mean that they cannot or could not deliver the service or produce the desired outcome. PbO also requires robust accountability and governance frameworks that include effective reporting and a clearly articulated escalation process should issues arise. In essence, the success of PbOs is driven by clear definition of the outcomes that can be accurately measured to inform payments. PbO also requires robust accountability and governance frameworks that include effective reporting and a clearly articulated escalation process should issues arise. HEALTH INDUSTRY GROUP BULLETIN 8 Heather Watson Partner T +61 7 3233 8820 M +61 412 871 825 E email@example.com Swain Roberts Special Counsel T +61 7 3233 8889 M +61 448 115 647 E firstname.lastname@example.org Ren Niemann Partner T +61 7 3233 8770 M +61 414 904 962 E email@example.com Tony Roccisano Special Counsel T +61 73233 8894 M +60 414 994 183 T firstname.lastname@example.org email@example.com | www.mccullough.com.au At McCullough Robertson we work with both industry and government in creating and delivering successful PbO contracts.