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Payment by results is supposed to show what works, but what if it shows that nothing does?

I have mused in the past on the potential pitfalls of the Government’s proposal to outsource most probation services. The outsourcing to the private and third sector combines a traditional fee for service mechanism (providers get paid for the service, not its outcome) with a payment by results (PbR) element.

Ian Mulheirn, the estimable outgoing Director of the Social Market Foundation, recently published a forensic critique of the latest attempt by the Ministry of Justice (MoJ) to produce a PbR framework. The report is to the point and worth reading in its entirety but I want to dwell on the implications of Mulheirn's two key criticisms.

First, in order to be reasonably sure of making money on the PbR element of probation contracts, providers would have to attain a significantly better outcome (in terms of reduced re-offending) for significantly less money than has been achieved before in this country. Indeed, although I can’t find a reference, a major Home Office study undertaken by the last Government found there was no robust evidence anywhere in the developed world of a rehabilitation scheme at scale which delivered a sufficient reduction in recidivism to be deemed unambiguously value for money. The new probation providers would certainly need to do much better than the Peterborough social impact bond pilot, a scheme which ministers continue to praise.

Mulheirn’s second finding is even more intriguing: because most of the contract payment is based on fee for service, because it is so hard to make the PbR element profitable and because providers are only punished for failure if the deterioration in performance is deemed to be statistically significant, the best way to make a profit is to provide as cheap a service as possible, even if it means outcomes are worse than would have been achieved by the previous in-house probation service. As Mulheirn puts it:

The flat payment rate in the statistical significance zone also has the perverse effect of encouraging providers to cut spending on reducing reoffending. Again, because increases in reoffending are not penalised until they reach the point of being statistically significant, this encourages providers to strip out interventions, thus saving money, and raising expected gross profit.

In defence of the MoJ, the Department itself described the proposal that Mulheirn takes apart as a ‘straw man’ (apparently, another draft model is on its way). However, given that existing probation services, private companies and charities are currently developing their business models in line with the very tight schedule for implementation set down by the Department, it is surprising to read something so demonstrably ill-conceived.

This could be seen as mere incompetence but there may be a more subtle explanation of the Government’s apparent insouciance about the likelihood of its scheme delivering better outcomes. After all, a similar an attitude is visible in its relaxed response to underwhelming performance of the Work Programme.

Consider four points:

(1) For perfectly intellectually respectable reasons, many Conservatives are sceptical of the state’s ability to spend money wisely and achieve social improvement.

(2) Even defenders of state provision recognise that much public spending goes on 'dead weight costs'; things which would have happened sooner or later without  state intervention. For example, many released prisoners would not re-offend even if left entirely to their own devices, many unemployed people would get jobs without employment services.

(3) We continue to face a major squeeze on public spending, one which is worsened by the long list of cuts considered to be off the table because of their potential political toxicity.

(4) Nevertheless, it is hard, in the face of social problems, for ministers to defend a ‘there’s nothing I can do’ position without looking complacent or ineffectual (one reason why the state grows even under Tory Governments).

The medium term outcome of delivering services through payment by results while also cutting per capita spending on those services may be to highlight that public spending at the levels the taxpayer is willing to fund is simply not efficacious.

Thus if PbR fails to deliver better outcomes, gradually, ministers may find it easier to  divest themselves of various public policy responsibilities. To those who argue that such an approach is an abnegation of responsibility, the Government can point to the continuing existence of low performing PbR schemes and invite critics such as charities to put their money where their mouth is by becoming a provider themselves.

Opponents of outsourcing focus on the transfer of public funding and assets to the private and not for profit sectors. Critics of PbR worry that it may not lead to improvements in outcomes. But perhaps both are missing the point. The longer term, deeper impact of introducing payment by results in a context of austerity may be to provide a rationale for an unprecedented narrowing of the social outcomes for which Government accepts responsibility.

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