Health Industry Group
Getting Payment by Outcome (PbO)
contracting right
BULLETIN 4 • 26 JUNE 2015
Overview
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.
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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.
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.
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.
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PbO – WHAT ARE WE TALKING ABOUT?
Payment-by-outcomes (PbO), while relatively new is increasingly
INPUT OR OUTPUT
BASED FUNDING
MIXED PBO AND
OUTPUT FUNDING
FINANCED PBO
replacing the previous approach to commissioning service
delivery outcomes. In general terms, PbO is a procurement model
Customer bears
Customer and
Service provider
which measures outcomes as opposed to activities. In its strictest
risk of service
service provider
and investor
application, PbO means no outcome = no payment. That is,
achieving
share risk of
share risk of
governments only pay when agreed (and independently verified)
objectives
service achieving
service achieving
objectives
objectives
outcomes are achieved. In theory then, government no longer pays
PbO is a procurement model
which measures outcomes
as opposed to activities. In its
strictest application, PbO means
no outcome = no payment.
for ineffective services, taxpayers receive better value for money
Customers only
and more the risk is transferred onto service providers. However,
risk is opportunity
pure PbO is rarely adopted, with recent examples being a hybrid
cost of alternative
of traditional input-output based commissioning with some PbO
program not
contracting incorporated.
pursued
Figure: Hybrid PbO models.
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GLOBAL ADOPTION
PbO VARIATIONS
Governments in the UK, US, Canada and Australia have begun
PbO is not in itself a constricted contract model, there are a wide
trialling various PbO models across a wide range of social services,
variety of arrangements in use as the very nature of customising
from employment to criminal justice to health services and the
service delivery means no single approach can be developed
provision of social housing. Payment by Results (as it is known in
and emulated. Any number and nature of incentives can and
the UK) has formed a central part of the Government’s approach to
are built in to contracts to ensure providers show evidence of
public service reform over the past four years, particularly in England.
outcomes achieved.
Closer to home, the Labor Queensland Government is seeking new
In some cases the PbO model extends to the use of social finance,
ways to approach the complex challenge of service delivery in an
such as through the use of Social Impact Bonds (SIBs), where social
environment of increasing demand and diminishing resources. The
investors fund service providers. There are an increasing number of
previous LNP Government launched a ‘contestability’ framework as a
private sector participants (equity investors and financiers) interested
result of, and in response to, the Commission of Audit report in 2012.
in pursuing an entrepreneurial approach to addressing social issues.
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
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.
„„Verifiable and verified outcomes are required to trigger payments
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WHAT ARE THE CHALLENGES?
By way of example:
If one of the main benefits of PbO is increased flexibility and
„„a service funded to provide ongoing care and monitoring of
innovation in service delivery then the question must be asked – how
patients post hospital release (injury rehabilitation/post-natal/
is this to be achieved? What do we mean by flexibility? What do we
mental health) may have KPIs detailing regular and prescribed
mean by innovation?
visits, calls to patients and other monitoring over a set period
Existing contracting models for outsourced service provision have
historically contained prescriptive methodologies for measurement
and Key Performance Indicators (KPIs) that demonstrate certain
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.
of time or at a time determined no longer necessary following
clinical assessment
„„back-to-work programs for the long-term unemployed adopted
activities along the delivery continuum, without specifying the desired
by the Queensland Government in the late 1990’s and early
or actual outcome.
2000s were relatively easy to measure and prove: a certain
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
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.
identifying these desired outcomes with sufficient detail and clarity
These are not true PbO models. A PbO model of delivery would
and also reformulating KPIs so that they actually describe those
require clinical assessment (evidence) of a patient demonstrating their
outcomes in a measurable or verifiable manner.
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.
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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.
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
Then there are the ‘incentives’ to be considered, another aspect of
procurement and contracting process requires careful consideration
PbO that makes it what is or can be. Is government in a position to
of individualised and customised outcomes.
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?
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KEY CONSIDERATIONS IN PBO CONTRACT
ADMINISTRATION
PbO SUCCESS HINGES ON CLARITY
„„The need for a seamless handover from negotiation
that can operate viably while awaiting payment at the conclusion of
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
PbO also requires robust
accountability and governance
frameworks that include
effective reporting and a clearly
articulated escalation process
should issues arise.
the contract
„„Improved due diligence, particularly on the legislative framework
and the legacy systems and programs
One criticism of PbO is that it favours larger organisations or those
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.
„„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
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Heather Watson
Swain Roberts
Ren Niemann
Tony Roccisano
Partner
Special Counsel
Partner
Special Counsel
T +61 7 3233 8820
T +61 7 3233 8889
T +61 7 3233 8770
T +61 73233 8894
M +61 412 871 825
M +61 448 115 647
M +61 414 904 962
M +60 414 994 183
[email protected]
[email protected]
E [email protected]
T [email protected]
At McCullough Robertson we work with both industry and
government in creating and delivering successful PbO contracts.
[email protected] | www.mccullough.com.au
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