MORE WITH LESS Rethinking public service delivery
by Ian Mulheirn and Barney Gough
MORE WITH LESS Rethinking public service delivery by Ian Mulheirn and Barney Gough
FIRST PUBLISHED BY The Social Market Foundation, December 2010 11 Tufton Street, London SW1P 3QB Copyright Š The Social Market Foundation, 2010 The moral right of the authors has been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of both the copyright owner and the publisher of this book.
THE SOCIAL MARKET FOUNDATION The Foundation’s main activity is to commission and publish original papers by independent academic and other experts on key topics in the economic and social fields, with a view to stimulating public discussion on the performance of markets and the social framework within which they operate. The Foundation is a registered charity and a company limited by guarantee. It is independent of any political party or group and is financed by the sale of publications and by voluntary donations from individuals, organisations and companies. The views expressed in publications are those of the authors and do not represent a corporate opinion of the Foundation.
CHAIR Mary Ann Sieghart
MEMBERS OF THE BOARD Viscount (Tom) Chandos Gavyn Davies Daniel Franklin Martin Ivens Graham Mather Brian Pomeroy
DIRECTOR Ian Mulheirn
CONTENTS
ACKNOWLEDGMENTS
7
ABOUT THE AUTHORS
8
EXECUTIVE SUMMARY
9
CHAPTER 1: INTRODUCTION
18
CHAPTER 2: THREE WAYS TO DELIVER PUBLIC SERVICES 23 CHAPTER 3: STARTING WITH THE CITIZEN
28
CHAPTER 4: OUTCOME-BASED COMMISSIONING
43
CHAPTER 5: WEAK OR ABSENT MARKETS
60
CONCLUSIONS
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ACKNOWLEDGEMENTS
The authors are grateful to our sponsor – Avail and The Learning and Skills Council – for enabling this work to go ahead. They would like to thank colleagues and external supporters of SMF for their help in developing the ideas in this essay. The authors are particularly indebted to Jeff Masters and David Furness for their thoughts and reflections.
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ABOUT THE AUTHORS IAN MULHEIRN Ian Mulheirn was appointed Director of the Social Market Foundation in October 2008. He joined the Social Market Foundation as the Chief Economist in February 2008, after three years as an economic advisor at HM Treasury. He has worked in a variety of policy areas including child poverty, savings & investment, welfare to work and higher education funding. He has also undertaken research into the drivers of worklessness in London and evaluation of the Working Tax Credit and the National Minimum Wage. He has a Masters degree in Economics from university College London and an undergraduate degree in Philosophy Politics and Economics from Oxford University.
BARNEY GOUGH Barney joined the SMF as a researcher in March 2006. He coauthored and edited a number of publications before working on the SMF Health project and co-authoring the final report. He became Head of the Commissioning programme at the SMF in 2009, and led the reducing recidivism research project. Barney now works for the youth and community charity The Challenge network. He took his BA in social and political sciences at Emmanuel College, Cambridge University.
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EXECUTIVE SUMMARY While public service reform has been on the agenda for years, in the times of plenty, it has lacked the urgency or coherence that today’s fiscal situation demands. This paper argues that a marketbased approach to public service delivery is the basis for public service effectiveness and efficiency over the coming decade. The fitful progress towards greater market-based provision has been piecemeal and lacked a coherent framework to help policymakers to think through the benefits and the pitfalls of greater marketisation. This paper sets out such a framework to help government think through the reasons for deploying the baffling array of commissioning approaches in the delivery of public services. There are three ways to deliver public services: command and control by central government, a trust model of devolved power to front line professionals and putting power in the hands of service users through choice and control. Command
and
control
models
have
been
useful
in
prompting significant improvement in certain aspects of public service delivery. For example waiting times in the NHS have come down in response to central government diktat. But poorer patients are not well equipped to negotiate systems that are fixated on government targets and there are information problems too – civil servants do not necessarily know enough to be effective. Trust models have the advantage of securing good relations with motivated professionals. And they remove some of the unintended
consequences
of
top
down
performance
management that can be a feature of command and control. But trust models are vulnerable to producer capture – services
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arranged for the convenience of the people who work in them not the people who use them. Choice and competition gives consumers the option to take their custom elsewhere in a real market setting as providers are forced to respond to their needs. Markets offer strong incentives for providers to ensure that costs are minimised where possible. But in addition to these static efficiency gains, the pluralism of markets offers dynamic benefits of increased service effectiveness and innovation over time, as different providers compete to find more effective ways to serve citizens. What does this mean for policymakers? The first insight is that while ensuring fairness and efficient societal outcomes are important reasons why government must fund services – as, for example, in the case of education – there is no such rationale for funding to be accompanied by direct government provision. And history shows us that centrally planned and directed systems tend to be inefficient. Therefore the best way to deliver services is to start with the citizen and rely on market mechanisms to deliver efficiency gains. That private markets often result in unequal outcomes does not reflect a causal relationship between markets and inequality. Rather unequal market outcomes are a reflection of the fact that citizens typically come to the market with different levels of resources. Under these conditions markets often exacerbate inequality. But this situation is precisely what state funding avoids, since publicly funded services can be allocated according to need. Citizens come to public service markets as equals. What does all this mean for policy in practice? It means that in every policy area we should begin by thinking about handing the money to the service user. Putting the service user in control of
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the public money spent on them should be seen but as the only place to begin. By thinking through the reasons why such an approach can fail, we can establish a framework for public service delivery.
PUTTING THE SERVICE USER IN CONTROL There are a range of different forms of this kind of market approach, the most common of which are the vouchers, direct payments to users or choice. In education, putting the service user in control means allowing parents to choose a school for their child, while giving parents cash or vouchers to pay for childcare requirements in a way that suits their needs, has a similar effect. All of these approaches are vehicles for personalisation, seeing the citizen as consumer, and promoting choice to drive provider competition and therefore service improvement. True personalisation of services is valuable firstly because it allows resources to be allocated to where they’re most needed – static efficiency. By setting it in a market context, personalisation also stimulates providers to find better ways of doing things over time. In order to break the stultifying central control of public services, policy-makers must think of the ultimate service user as a consumer, and design delivery around them. However, despite the evidence that starting at the individual level can improve the efficiency and quality of some public services, it is true that the consumer model will not work well all settings. Understanding the reasons for the model’s failure can help policymakers to know what tools to turn to next.
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There are a range of circumstances that may render it inappropriate for devolution of spending control and/or choice to the service user. Three key issues are the following: ·
Problems of agency: where the chooser’s decisions affect others - specifically taxpayers. This can occur in two forms. First, there may be a problem of agency in terms of what the ’consumer’ spends the money on. For example, if personal budgets in healthcare were commonly spent on things that had no beneficial effect on patients’ health outcomes, the taxpayer – who might then have to foot the bill for more effective treatment – might legitimately feel aggrieved. The second form of agency is in the form of the amount of the good consumed. Where the agent is keen to consume the service, such as a motivated jobseeker keen to receive guidance from a personal advisor, expenditure can be rationed. But what about situations in which the jobseeker is reluctant to engage – where they tend to ‘underconsume’ the good of employment support? In each of these cases of agency, particularly where it is difficult to identify under- and over-consumers,
a
pure
consumer
approach
is
inadequate. ·
Information problems: where complex or infrequent decisions by users lead to weak competition in markets. Effective markets operate in conditions of repeated choices that allow consumers to learn from their mistakes and test out different products. This leads to effective competition
between
suppliers,
reducing
prices,
improving quality and stimulating innovation over time. But within a given public service it is important to ask whether these conditions hold. In acute healthcare, for example, it would be naïve to imagine that the patient could act unaided as a consumer of health services – both
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because they have limited experience of such choices and because the information asymmetries involved are too much for most patients to overcome without assistance. ¡
Coordination problems: where services, by their nature, require
central
co-ordination. Many
public services
require that expenditure is centrally coordinated. In these cases, fragmented individual financial control and direct choice is clearly not viable or desirable. An obvious example here, where devolution of choice and control to the individual is fundamentally unworkable, is street cleaning. Coordinated services are therefore a class of public service for which we need to find a different starting point than the individual level. Where the above problems arise, we must instead look to a level above the individual to commission effective and efficient public services. Employing a third party to coordinate the delivery of services can overcome problems of variability in the levels of desired consumption on the part of service users. A third party is also necessary to overcome coordination problems. These examples typically mean needing moving from a situation where providers compete for customers in markets, to one where they compete to win contracts for markets – for example, competing for the right to operate all criminal justice rehabilitation services in a given area. Competition for customers where the customer does not want to engage will fail to deliver good outcomes. But without a consumer in charge, how can we ensure that services are responsive to users’ needs and cost effective? One approach is for government to commission for outcomes.
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COMMISSIONING FOR OUTCOMES By only paying providers for getting results, and freeing them up to think creatively about how to achieve them, outcome commissioning offers the possibility of combining central accountability and front line flexibility. There is a great deal of potential for outcome based commissioning to deliver real improvements across a range of services. Perhaps the most common objection to paying for outcomes is that it can lead to ‘cream-skimming’. This is the situation where service providers choose to focus on easier-to-help (and therefore cheaper) service users and ignore the more expensive ones. However, it is important to note that cream-skimming behaviour is no less common in publicly-delivered services than it is under privately-delivered ones. In the private sector, the problem of cream-skimming behaviour is one that stems from the payment structure offered to contractors. In welfare-to-work services, for example, when contracts offer the same outcome payment for successfully moving any jobseeker into work, providers inevitably concentrate on the easiest cases. The payment structure is designed to achieve the most job outcomes for least cost. But this is something that publicly-delivered employment services are also encouraged to achieve. Indeed, the Jobseekers Allowance conditionality regime is
explicitly
designed
to
minimise expenditure, with the
consequence that those jobseekers with the biggest problems have to wait a year before getting intensive support. Crucially, cream-skimming behaviour it is not intrinsic to the outcome payment approach and can easily be avoided if it is deemed to be undesirable by policymakers.
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There are reasons why paying for outcomes, in particular, can fail. The three common ones are as follows. ·
Measuring success: where simple, measurable metrics of success do not exist it is difficult to tie payments to good outcomes.
·
Accountability: where there are too many external influences to reliably link provider interventions to successful outcomes, accountability can be too weak to allow payment by results.
·
Time-frames: when outcomes lie too far in the future for private investors to fund delivery, the approach will not be viable. Despite the potential of more market-based delivery to drive
public service productivity over the coming decade, there are many types of public services that diverge significantly from the perfectly
competitive
ideal.
The
consumer
approach
and
outcome-based commissioning are not appropriate delivery mechanisms in all cases. Policymakers should be wary of structures that may superficially resemble markets but do not provide the pluralistic and competitive environment that is needed to deliver improvements.
WEAK OR ABSENT MARKETS Where markets are weak or absent from public service delivery for reasons such as those outlined above, it becomes necessary to re-consider the other two means of public service delivery: command and control, and trust models. Central command and control may be seen as the ‘least bad’ option where market-based delivery is not viable. As the last government began to outline in its lat year of power, it may be
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possible to complement top-down targets with universal service rights and entitlements to augment user ‘voice’. One example of this is the ‘September Guarantee’ for 16 and 17 year-old school leavers, which entitles them to a guaranteed place in education or training. In an era of cuts, such entitlements may be effective in safeguarding minimum standards, thus reducing the variability of performance if nothing else. Trust in professional delivery, on the other hand, reinforces the ‘gift’ model of public services, where the service user has services delivered to him or her almost as if they are a gift. Putting decisions in the hands of producers in this way, however well-intentioned, is unlikely to enhance the responsiveness and innovation of public services. One form of the ‘trust’ approach is the mutual model. This has some
advantages
over
both
command-and-control
and
contacted-out delivery models. In situations where services are so complex that either users or commissioners are unable to be able to specify exactly what services they need, professionals are arguably in a better position to determine the allocation of resources at the front line than are distant public sector managers. One area in which mutuals could be effective is in healthcare where information asymmetries are common. Their mission-driven nature may, in some circumstances, also be better than trying to specify nebulous delivery requirements in contractual for as might be more important under contractedout provision. However, the mutual model may prove unstable in practice. While it is often the case that those closest to service users understand their needs, that does not mean that providers are unstintingly pursue those needs.
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There are numerous forms that a market-based to public service reform can take. But the starting point must be the individual service user, in the form of individual budgets and choice. A policy framework that starts with the user would represent a revolution in thinking from the Beveridgean model that has continued to dominate service delivery despite the reforms of the past two decades. But where the consumer model breaks down, as it does in many public services, it is important to understand the nature of the public service, and why choice fails, to inform our understanding of which tool to reach for next.
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CHAPTER 1: INTRODUCTION A HOLE IN THE PUBLIC FINANCES Developed nations are emerging from the effects of a severe global recession. In Britain the recession has ripped a deep hole in the public finances, being concentrated in areas of the economy on whose activity the exchequer relied for a substantial portion of its revenue. The economy might be starting to rally, but the impact of the recession on the UK public finances will be felt for years to come. With the 2009-10 deficit coming in at £156 billion, the Chancellor has set out plans to cut £83bn out of public spending by 2014-15, with further fiscal tightening planned thereafter. 1 A decade’s downward pressure on public spending will have severe implications for public services. In addition to the problems created by the fiscal crisis, longterm trends are also putting pressure on the delivery of public services. Demographic changes, such as an ageing population, coupled with increasing public expectations, mean that demand for high quality public services is changing and growing. On top of this, global trends such as climate change, migration and security threats are throwing up new and complicated challenges for public service delivery. While these trends drive increasing demands on public services, the impending and unprecedented fiscal squeeze means that the country faces a challenge to sustain public services over the next decade, let alone improve them. Unless the government can work out how to achieve ‘more for less’, we face a bleak decade.
1
HM T reas ur y, Budge t 2 01 0 (L on d on : HM SO , 2 01 0), 15.
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One approach to dealing with the hole in the public finances is to attempt to continue delivering the same services via the same structures, only more cheaply. This might be achieved by driving down unit costs in the procurement process, by reducing up-front investment, or by making small cuts right across departmental budgets (commonly known as ‘salami slicing’). These strategies are tempting because they do not require any radical new thinking and would secure initial savings. But unless such cuts are accompanied by a sophisticated analysis of the
delivery
tools
that
are
needed
to
improve
service
effectiveness on the front line, cutting from the centre alone is unlikely to succeed in achieving efficiencies for two reasons. First, blunt cuts to some services can lead to unforeseen ballooning costs in other areas. For example, if GP access were to be scaled back, it is likely that more patients would turn to A&E departments instead, at greater expense to the exchequer. Second, centrally-imposed cuts without a strategy for reform will lead to rapid deterioration in service quality. Ultimately this will lead either to a collapse in the service provision altogether or a popular outcry justifying a return to renewed and unsustainable spending without reform. But in developing a strategy to accompany public spending cuts, decades of experience tells us that central determination of what to cut and what to keep is bound to fail. Whitehall is simply incapable of possessing the necessary knowledge to maximize the public value of public money through centralised command and control. But ‘public service reform’ has been a permanent part of the public policy landscape for years, and the way in which we
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commission public services appears to be in a state of permanent revolution. In some areas individual budgets are advocated as the next
stage
of
reform,
while
in
others
outcome-based
commissioning is the new buzz; an outbreak of enthusiasm for the ‘John Lewis model’ of service delivery has been a recent feature of the reform debate, while in other areas, an expansion of service users’ choice is advocated. And at all times, politicians pay at least lip service to the idea of freeing up frontline professional to do what they do best without hindrance from Whitehall. What are we to make of this patchwork of ideas? How do the different ideas about public service delivery and commissioning relate to one another? And how should we think through which delivery model is appropriate and which unworkable for a given public service? For
decades,
these
questions
have
gone
unanswered.
Contradictory fashions for reform in different parts of the public services have waxed and waned, and the lessons of success or failure of different approaches have too rarely been heeded in other policy areas. This paper sets out to provide a framework for policymakers to think through the options for commissioning public services. In doing so it articulates an approach to public service reform that can achieve often contradictory policy goals: strengthening financial accountability at the centre, while freeing professionals to make services effective and responsive to citizens’ needs.
WHAT THIS PAPER ARGUES While public service reform has been on the agenda for years, in the times of plenty, it has lacked the urgency or coherence that today’s fiscal situation demands. This paper argues that a market-
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based approach to public service delivery is the basis for public service effectiveness and efficiency over the coming decade. It sets out a framework by which policymakers can think through the reasons for using different approaches to commissioning the delivery of public services. Chapter 2 outlines the three fundamental ways to arrange the delivery of public service: from government through command and control; through professionals in a trust model of delivery; or by handing power to individuals or organisations procuring measurable outcomes on their behalf. While a combination of each of the three approaches is usually necessary, it is helpful to think about service delivery in terms of which of them should be the principal delivery mechanism. We argue that market mechanisms, thoughtfully deployed, offer the theoretical and empirical basis for effective reform. Markets are a powerful force for change, but inappropriately or partially deployed, they can lead to perverse and unintended outcomes. Chapter 3 establishes the starting point for a market-based approach: the individual service user. Starting with putting power in the hands of the service user is an approach that can be powerful in driving joined-up and effective services, under the right conditions. This chapter elaborates on the potential and the limits of such an approach, arguing that giving power to the individual should always be the analytical starting point for policymakers. Policy areas that appear to be good candidates for more of a choice and control approach include skills policy, chronic health care, housing provision and schools. In practice, many public services are inappropriate for the simple consumer model of delivery alone, but a careful analysis of the reasons why can point the way to an alternative commissioning approach.
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In the many cases where treating the service user as consumer breaks down, it can be necessary to move to a commissioning model that puts a third party to coordinate and join-up services, making them responsive to users’ needs. But to achieve central financial accountability at the same time as liberating the front line to use their knowledge of the situation to provide appropriate services is a continuing conundrum. Chapter 4
therefore
discusses
the
potential
of
outcome-based
commissioning to achieve these two goals, in a range of new areas - including offender management, employment services and skills provision - while also exploring the limitations of the approach. Finally, Chapter 5 considers what options policymakers have for the delivery of services in which markets are inherently weak or absent. In such cases contracted-out service provision suffers from being able only to exert weak competitive pressure on providers and in some cases it may be that delivering services either by central control or frontline professionals may be more effective. The answer will depend on the nature of the service. In establishing a framework, this paper aims to go further than simply describing the feasible range of approaches to service commissioning. Instead this framework provides a tool for policymakers to analyse the essential nature of a range of public services, and think about the appropriate market instrument to improve their delivery.
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CHAPTER 2: THREE WAYS TO DELIVER PUBLIC SERVICES
Over the past twenty years, a wide range of different models for the delivery of public services has emerged. The Thatcher and Major governments rapidly expanded the range of services delivered by private contractors, introduced purchaser-provider splits within the health service and elsewhere, and tried to expand choice in schools. The 1997 Labour government initially looked to improve service delivery through Whitehall-determined targets across a range of services, before returning to hone many of the market-based approaches developed in the 1990s. In recent years, the last government advocated a range of new mechanisms - including individual budgets for service users, payment-by-results for contractors, and most recently mutuals as a way to energise public service delivery. Despite the fact that across different public services very different delivery models are deployed, little consideration is given to how policymakers arrive at one model rather than another in any given service. The absence of any theoretical framework to govern this decision arguably means that effective strategies are slow to migrate from one service area to another. Meanwhile, we are slow to learn the lessons of approaches that have been less successful. So what are we to make of this blizzard of delivery models? In the fiscally straightened times ahead it will be important to develop a way to analyse public service delivery across the board if we are to identify how to get more from less. Public service delivery, unlike the private economy, involves three kinds of actor: the citizen user of the service, the producer of the service and the government. These three stakeholders provide the framework for thinking about how effective and 23
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efficient services can be delivered. While all three must, to some extent, be involved in the methods of delivery of any service, how primary decision-making power is allocated across the three actors defines the model of service delivery. ·
Retaining power primarily with government to steer service delivery
through
targets
and
centrally
determined
strategies, delivered by public sector providers, represents the command and control model of delivery. ·
Devolving power to front line professionals who are then left to shape the service according to their perception of need, is referred to as the trust model.
·
Putting power in the hands of service users through choice and control.
COMMAND AND CONTROL The command and control approach is potentially effective at addressing specific problems in service delivery, such as long wait times for patients in A&E. It also has the advantage of establishing a clear line of accountability from democratically elected politicians to service users. But as Liam Byrne has argued, the welfare state is the “site of capture by the middle class.” Inevitably those who are more articulate or who know how systems work are better able to lay claim to public resources available, whether that be in health education or elsewhere. For this reason, centralised, bureaucratically delivered services have led to deeply unequal outcomes and public services have failed the people for whom they were primarily intended: the poor. In the coming decade of fiscal austerity, this inefficiency is something that no government, of whatever hue, can either afford or allow to persist.
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Moreover, the centralised approach suffers from endemic information problems: those furthest away from the front line – civil servants and ministers – try to direct the operational side of things with little understanding of the needs of service users or the knock-on effects of their targets. At the same time, those actually involved in service delivery have little autonomy to respond effectively to service users’ needs.
TRUST These well-worn criticisms of centralisation therefore lead many to advocate that greater professional autonomy and trusting the professionals as a better route to effective service delivery. Indeed, it is often the case that the complexity of services means that professionals have the greatest claim to service control on information grounds. Nevertheless,
‘trusting
the
professional’
clearly
carries
significant risks. Whether well-intentioned or not, unaccountable control of service delivery by professionals tends to encourage a system primarily built around the needs and desires of those professionals, rather than those of the citizens for whom the services are intended. Such producer capture has been evident in the fact that huge numbers of GPs chose to opt-out of delivering out-of-hours services to patient under the Quality Assurance Framework.
CHOICE AND COMPETITION IN MARKETS The shortcomings of both central and professional control of public service delivery therefore lead us to consider putting power in the hands of service users through choice and control. Creating markets for the delivery of public services and empowering citizens as consumers has often been advocated as
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a route to more responsive, efficient and effective public services for three reasons. Since consumers have the option to take their custom elsewhere in a real market setting, providers are forced to respond to their needs. Second, markets offer strong incentives for providers to ensure that costs are minimised where possible. But third, and in addition to these static efficiency gains, markets offer dynamic benefits of increased service effectiveness and innovation over time as different providers compete to find more effective ways to serve citizens. In short, where applicable, markets drive better, cheaper and more responsive public services than either of the two other models. The challenge, then, is to work out where and how to apply them. While the theoretical benefits of market-based public services are clear, the reality of service delivery is complicated. But a clear understanding of the justification for putting power in the hands of the citizen points the way to a starting point for policymakers in analysing public service delivery. In developing the framework this essay suggests a range of policy areas where the delivery or commissioning approach might benefit from reform in order to produce better services with less money. The remainder of this essay provides a practical and applicable framework for policymakers to think through the appropriate vehicles for the delivery of public services, and what that means for commissioning and procurement in practice. To derive that framework, we must begin by defining the essential role of the state in public services. Isolating the essential nature of public services then provides a starting point for thinking about commissioning that service provision. Taking the first step in setting out the framework, the next chapter considers in more detail the rationale for starting with the individual service user. It then goes on to look at why the
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consumer approach can break down in some policy areas, making it inadequate as the basis for shaping delivery in every case. Understanding the limitations of the consumer model in various settings points the way to the next stage in the framework.
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CHAPTER 3: STARTING WITH THE CITIZEN
The public service reform agenda of the past twenty years has been characterised by perpetual revolution in the delivery and commissioning of services. But this has proceeded without any apparent systematic attempt to think through what the nature of a given service means for how it should be delivered or commissioned. In order to consider whether services might be better arranged, it is important to begin by re-articulating the fundamental goals of public services. Why do we have them and what are their aims? There are two reasons for the existence of public services. The first is one of efficiency: services need to be coordinated by the state where the free market economy would not otherwise provide. This is the case for public goods in the traditional economic sense (such as street lighting) or the correction of externalities or market failures (such as the benefit to wider society of educating a citizen). Private funding of such services (at least without state backing) is beset by risks of free-riding of non-paying users of the service, leading to under-provision of them compared to the social optimum. The second justification for public services is one of fairness: we are concerned not to leave the provision of some services to the free market. Why? Because we recognise that the distribution of wealth and income is such that consumption of essential services
would
be
deeply
unfair
without
government
intervention. Hence healthcare, education, social care, childcare, employment support and many other government services are publicly funded on the grounds of fairness. In most cases, the fairness and efficiency arguments cohere in the same service, as for example in health and education. 28
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But while these justifications outline the theoretical rationale for public services, they say nothing about the nature of service delivery. While it is the case that public services are intrinsically different to privately consumed goods, that difference derives from the nature of their funding, not the method of their delivery. That taxation funds public services does not mean that government must provide them. In order to get from establishing the need for public funding of public services to a view on their appropriate
delivery,
we
need
an
additional
theoretical
framework. As a starting point for the delivery of public services, the assumption that public funding implies state delivery should strike us as very odd. Indeed, as many have noted in the past, top-down allocation of public services, while it promises equality of provision, does nothing of the sort. 2 People of different political persuasions can disagree on the appropriate level and scope of public services. But, insofar as services are delivered at all, all sides should agree that equality and efficiency goals remain their aim. In all this, state or top-down delivery has confounded the fundamental goals of public services. But if the state should not determine who gets what services, then who else should shape them but individual citizens? In all other areas of life individuals determine the shape of the provision of goods and services through their own choices and preferences. Standard economic theory, and a century-long experiment with state socialism, suggests that, as a rule, this approach is generally superior to any other method of allocating resources. The left has often reacted against the application of such approaches to public service delivery because of a visceral 2
Juli an L e G ran d , T h e oth e r i nv i si bl e h an d (Pri n c eton Un i vers i ty Pr es s , 2 00 7), 3 3.
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sense that when individuals are allowed to exercise their own preferences - i.e. market mechanisms - the market throws up unequal outcomes for citizens. They rightly argue that such disparity of outcomes would be unacceptable for public services, particularly those which are primarily justified on the grounds of fairness (such as healthcare). But that private markets often result in unequal outcomes does not reflect a causal relationship between markets and inequality. Rather unequal market outcomes are a reflection of the fact that citizens typically come to the market with different resource endowments. Under these conditions markets often exacerbate inequality. But this situation is precisely what state funding avoids, since endowments for publicly funded services can be allocated according to need. Citizens come to public service markets as equals. So while it will always be government’s role to determine the principles on which public resources are apportioned to citizens, the state should aim, as far as possible, to leave the shaping of services in the hands of individuals. As an approach to public service delivery, and under the right conditions, markets offer the most powerful method of matching needs with resources, and therefore of getting more for less in public services as a whole. What does all this mean for policy in practice? It means that in every policy area we should begin by thinking about handing the money to the service user.
THE USER AT THE CENTRE: VOUCHERS, CHOICE AND DIRECT PAYMENTS The above analysis makes giving citizens their money to spend the natural starting point for all public service delivery. Putting the service user in control of the public money spent on them
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should be seen, not as one among a suite of options for service delivery, but as the only place to begin. The onus should be on policymakers to provide a compelling case for not handing the money directly to the service user. In effect there are a range of different forms of this kind of market approach, the most common of which are the following. ·
Vouchers: individuals are given virtual money to spend with approved providers. Childcare vouchers are an obvious example here.
·
Direct payments: service users are allocated resources and allowed to choose the service that best suits their needs. The social care individual budget pilots that concluded in 2008 are a good example of this approach.
·
Choice: citizens are provided with a range of service providers to choose from. The new coalition government’s plans to expand school provision are aimed at facilitating parent choice here.
All of these are vehicles for personalisation, seeing the citizen as consumer and promoting choice to drive competition and therefore service improvement. There are differences between these approaches in that choice and vouchers are rather like picking a set menu, while direct payments are more akin to choosing a la carte. The differences between them tend to consist in the constraints on the uses to which the money is put. But these differences are less important for the purposes of this essay: in all cases the funding level is determined by government and the money follows the service user’s decisions, which can be more or less constrained. The idea of personalisation has been claimed by advocates on both the right and left of the political spectrum. Fernandez et al. argue that this is because “Conservative commentators can
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applaud its market-like characteristics, while for New Labour the policy resonates neatly with the broader thrust of the choice in public services campaign.” 3 Such a degree of consensus should really be unremarkable, since the argument for personalisation is built around improvements in both equity and efficiency. If the theory is borne out by the facts then one might expect politicians from all sides to welcome it as a rare opportunity for unambiguous improvement in government policy. True personalisation of services is valuable firstly because it creates a market in the provision of public services, allowing resources to be allocated to where they’re most needed and stimulating actors to find better ways of doing things over time. The first of these characteristics means that citizens get to shape the services they use but also face a clear limit to the value of the services they can consume – thus encouraging them to achieve the best value for money. The second characteristic offers the potential for the bottom-up approach to stimulate innovation, and in doing so raise the quality and lower the price of the services that are provided. So what does the evidence say about the money-saving potential of putting purchasing power or choice in the hands of individuals? The extension of budgetary control to social care users and health service users is a phenomenon that is in its infancy. This means that conclusions about the effectiveness of the approach can draw on a relatively limited evidence base. Many researchers have concluded that, compared with topdown approaches, social care costs are reduced by devolving more control to the individual. For example, Hasler, reporting on direct payments to social care service users in West Sussex,
3
Fern an d ez, J.L . , Ken d all, J ., Dav ey , V . e t al ‘Di rec t paymen ts i n E n g lan d : fac tors li n k ed to vari ati on s i n loc al provs i on ’ , Jou rn al of Soc i al Poli c y, v ol. 36 , n o. 1. 97- 1 21
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SOCIAL MARKET FOUN DATION
concludes that, for the small group of people involved, saving of some £2,000 per person were made. 4 Many of the studies commonly cited in support of the cost-saving effects of individual budgets are often criticised on the grounds of methodology. The
most
rigorous
and
systematic
evaluation
of
the
deployment of individual budgets was the 2008 evaluation of the Individual Budgets Pilot Programme in the UK. 5 The authors conclude that, overall, there was no statistically significant difference in the cost of care packages between randomised groups of individual budget holders and a comparison group. However, they do conclude that for several specific groups people with mental health problems, younger disabled people and, perhaps, those with learning difficulties - individual budgets do appear to be more cost-effective. Self-directed support has been tested for people managing mental health conditions in a range of US states. Evidence from Florida suggests that service users are more likely to direct spending away from crisis support and towards employment support and preventative measures. 6 However, since service users were self-selecting it is very difficult to draw firm conclusions about the causal effect of self-directed support. Choice in schools has been an element of education policy since the 1988 Education Act, and successive governments of both parties have tried to improve the choice mechanism. And
4
Fran c es Has le r, “L i vi n g i s about m ore th an bed an d break fas t” , He al th M atte rs ( 19 97) vol. 3 2, 12- 1 3
5
Caroli n e Glen d i n n i n g et al, E v al uati on of th e I n divi dual Budge ts Pi l ot Programme : Fi n al Re port (York :
6
Vi d ya A lak es on , “In te rn ati on al d evelo pmen ts i n s elf- d i rec ted c ar e”, I s s ue s in I n te rn ati on al He al th
Un i vers i ty of Yo rk Soc i al Poli c y R es earc h Un i t, 20 08) .
Pol i cy (L on d on : Comm on wealth F un d , Fe brua ry 2 01 0).
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there is some evidence on the effectiveness of choice in schools in driving up standards. 7 But the scope for the market to drive up quality depends heavily on the context in which choice operates. For example, the success of choice in the Swedish school system was hampered by the fact that there is no mechanism by which poorly performing schools can ‘go bust’. Choice, in other words, does not necessarily equate to a market environment and is therefore no magic bullet on its own. For this reason, the success of the Conservative party’s plans to expand choice further in the UK will only lead to improved performance if they can find a way to allow a market – with all that entails for failing schools – to operate more fully. Current plans rely on parents taking over failing schools, but it is an open question whether this will occur in practice. So putting the power in the hands of the end-user can have advantages in terms of efficiency, responsiveness and innovation: the instrumental justification for markets. But it can also be argued that markets bring wider benefits on the libertarian grounds that giving people choice is intrinsically better than not doing so. By this way of thinking, the same service provided by the state would have more value had they been chosen by the ultimate user. User control over services turns on its head the paternalist
notion
that
public
services
are
a
‘gift’
from
professionals or the state, rather than a citizen’s entitlement.
AN EXPANSION OF CHOICE There is a wide range of public service delivery areas in which choice and control could be more commonly devolved to the individual, allowing them to prioritise their needs and exert 7
Jon ath an Wi lli ams an d A n n Ros s i ter, C h oi ce : th e ev i de n ce (L on d on : SM F, 20 04) .
34
SOCIAL MARKET FOUN DATION
pressure on providers. Some possible areas for reform include the following. ·
Skills policy. The Brown Government’s gradual roll-out of skills accounts represented a movement in the right direction, giving individuals much more control over how money is spent on their behalf. The Conservative party has outlined its concept of life-long learning accounts for individuals to build on skills accounts. Combined with guidance and advice, greater personalisation of skills funding offers significant real efficiency savings, by cutting out bulk-bought courses that may be a poor fit for both employee and employer.
·
Housing provision. In the face of ballooning Housing Benefit bill, the Local Housing Allowance was introduced by the government in 2008 to encourage recipients to shop-around for a good deal on their rent. However, as the public finances have tightened, the temptation to withdraw any excess money that recipients might otherwise keep under the scheme has precipitated a return to something more like the old system. The market principles of LHA remain, however, an area where empowering recipients to choose could produce better outcomes and save the exchequer money in the long-run.
·
Schools. As discussed above, liberalisation of school supply, as planned by the coalition, offers the possibility of a better market in education. The question of how to deal with failing schools, however, remains an area that lacks clear answers.
·
Long-term healthcare. The partial success of the individual budget pilots both here and abroad presents the possibility that, particularly when budgets are likely to be cut, putting control in the hands of the user can improve outcomes and reduce costs.
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THE LIMITS OF CONSUMERISM In order to break the stultifying central control of public services, policy-makers must, therefore, think of the ultimate service user as consumer, and design delivery around them. However, despite the evidence that starting at the individual level can improve the efficiency and quality of some public services, it is intuitively obvious that the consumer model will not work well all settings. For example, individual budgets in the provision of roads would decentralise the provision of that public good so much as to make co-ordinated decision-making all but impossible. Choice for offenders in the provision of prisons, if allocated to offenders, would clearly be absurd. So what is the nature of those public services that cannot be devolved to the individual? Until we have a clear understanding of the theoretical limitations of leaving the individual to commission, policy-makers will find it difficult to know how to commission at some other level, while simultaneously achieving value for money and stimulating innovation. Deconstructing what it is about services that makes them inappropriate for a consumer-centred approach enables us, first, to understand how to make choice work better. But secondly it allows a better understanding of the situations in which choice may be a bad thing. There are a range of circumstances, specific to each type of public service, that may render it inappropriate for devolution of spending control and/or choice to the service user. Three key issues are the following:
36
SOCIAL MARKET FOUN DATION
·
Problems of agency: where the chooser’s decisions affect others.
·
Information problems: where complex or infrequent
·
Coordination problems: where services, by their nature,
decisions by users lead to weak competition in markets. require central co-ordination. Each of these throws up a set of questions that policymakers must ask themselves in designing the commissioning of a given public service. 1. Is there a problem of agency? The problem of agency is captured in the question: is someone other than the actual service user affected by the decisions and outcomes of the service user? If so, it will be inappropriate to allow unlimited choice for the service user in circumstances where their interests are not directly aligned with those of others. Since public services are, by definition, publicly funded, the decisions of any citizen to consume them inevitably has an effect on others who also paid for them. Hence, agency is a fundamental problem for public services. But there are two versions of the agency problem: one relates to whether the level of use of services by one citizen is in the interests of other citizens; the other relates to the ends to which those resources are put. a) Agency in what is the money spent on A good example of the former type of agency problem is in the commissioning of employment services. The justification for public funding of employment services stems primarily from the cost to taxpayers of not providing such assistance to jobseekers.
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So both jobseeker and taxpayer have an interest in what kind of services the public money is spent on: the former might prioritise getting a certain type of job, while the taxpayer might prefer to get the person into the nearest available employment to reduce the benefit bill. Hence, leaving budgetary control entirely in the hands of the individual jobseeker is unlikely to be cost-effective for government. A similar agency problem is evident in skills provision. The justification for public funding of skills acquisition rests on the idea that its value to wider society is greater than that to either the individual or the employer on their own. But that means that employee, employer and future employer all have a legitimate interest in how public money is spent. Leaving that control entirely in the hands of any one of those possible ‘agents’ to direct the investment is unlikely to result in the best social outcome for all. Where agency problems imply a divergence of aims between interested stakeholders, devolution of budgetary control entirely to one of them will not be cost-effective. b) Agency in the amount consumed: do users tend to underconsume or over-consume the service When the actions of the service user affect others, there is a role for government in working out how to ensure that the ‘right amount’ of the service is used. Where the danger is that people want unaffordable amounts of a good thing (perhaps in social care) the solution is reasonably simple: a limit on expenditure is set and within that limit the individual can still be free to choose. In such cases individual budgetary control is highly appropriate. A gatekeeper of some kind is necessary to allocate resources according to need – to set an individual’s budget constraint – but the user is free to decide how to maximise the value of those resources by shaping the services used themselves.
38
SOCIAL MARKET FOUN DATION
But where the danger is that users tend to under-consume a public service, this raises the problem that they may need to be ‘nudged’ or forced to use more of the service, rather than having the consumption decision left to them as an individual budget or choice mechanism would imply. In these situations the agency problem stems from the fact that the primary ‘service user’ is not the only, or even perhaps the main, person set to benefit from their engagement with the service. The most obvious example of such a situation is in the incarceration of prisoners who, given the choice, would obviously choose not to be locked-up. In such cases it is clearly necessary for the service to be enforced by someone other than the ultimate user, and individual choice or budgetary control are, by definition, inappropriate. More interesting than examples of uniformly over- or underconsumed public services, however, are cases where the level of desired consumption varies massively from person to person within the same service. For example, while some people are in danger of monopolising their GP’s time with minor ailments that do not need attention, a problem at least as large is that high-risk groups never visit their GP until their health condition becomes more serious and hence more expensive to treat. Here, the challenge for the provider is to act as a gate-keeper for those who ‘over-consume’ but to be proactive in getting underconsumers to engage. The difficulty, of course, is in identifying which people are under-consumers and which over-consumers. Similar variations in consumption are clear in such things as school education and welfare-to-work, where some pupils or jobseekers will want as much assistance as they can get while others will not engage. In these types of public service, a costeffective service depends on the extent to which users can be made to engage positively with the process. Neither learning nor job-search can happen without effort on the part of the service
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user. Such services are often described as being co-produced: the delivery of effective public services through the contribution of the citizen as well as that of the provider. In these cases of ‘co-production’ – where the engagement of the service user with the professional is integral to service effectiveness - the difficulties of variable levels of engagement by service users means that commissioning at the individual level is much more problematic. To create value from the public service, delivery involves an assessment of an individual’s desired level of consumption, combined with encouragement, incentives or sanctions if that desired level is too low from a societal perspective. But this co-production challenge is problematic, not least because differentiating between service users who are and aren’t engaged requires a fine level of detail in the hands of whoever
allocates
resources.
The
information
asymmetry
between service provider and user means that devolving decisions to the front line – both in terms of allocating resources and the approach to service delivery - is essential for costeffective outcomes. But front-line flexibility gives rise to questions about central accountability. Tackling this tension is the focus of the next section. 2. Is the choice too complicated or infrequent for the market to work effectively? In many public services it is the case that individual users might be well placed to make decisions about the service they would like to receive, but for the nature of the choice they face. Effective markets operate in conditions of repeated choices that allow consumers to learn from their mistakes and test out different products. This leads to effective competition between suppliers, reducing prices, improving quality and stimulating innovation over time. But within a given public service it is important to ask whether these conditions hold. Is the choice too complicated for the non-specialist to understand? Are decisions 40
SOCIAL MARKET FOUN DATION
made so infrequently that the would-be consumer has no opportunity to learn from past attempts? These information problems can render individual budgets and choice ineffective for achieving value for money in public services. Patient choice in acute healthcare provision, for example, could not, in most cases, be operated meaningfully or effectively without the close support and advice of a qualified professional. Where choices are complicated or infrequent for the user, guidance from professionals – along the lines of the Patient Care Advisors used in NHS choice pilots - is essential if costeffectiveness is to be improved. Personal management of chronic conditions, by contrast, is much more conducive to individual choice and control since there is plenty of opportunity for repeated choice and learning. Here, training such as that offered by the NHS Expert Patient Programme can help to ensure that service users are empowered to get maximum value for public money in the services they use. 3. Is there an identifiable service user? Many public services require that expenditure is centrally coordinated. In these cases, fragmented individual financial control and direct choice is clearly not viable or desirable. An obvious example here, where devolution of choice and control to the individual is fundamentally unworkable, is street cleaning. Coordinated services are therefore a class of public service for which we need to find a different starting point than the individual level. The above three characteristics of public services can render them inappropriate for a consumer-based approach. But even where choice is deemed viable on these dimensions, the policymaker’s work is not necessarily over.
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·
Demand needs to be sufficiently high to achieve the necessary economies of scale if cost-effective services are to be available. Hence the large increases in financial support for childcare since 1997 have made putting control in the hands of parents more viable than when funding was lower.
·
Similarly, sufficient supply-side capacity and flexibility is necessary
if
choice
is
to
be
effective.
Here
the
Government’s extension of the right to choose the hospital in which you are treated has opened up private hospital capacity to NHS patients to enable choice to work effectively. 8 Conservative plans to liberalise school provision are in a similar vein.
WHAT CAN POLICY MAKERS DO IN THE FACE OF THESE DANGERS? Where the above problems of agency, infrequent or complex choice, or coordinated services arise, we must instead look to a level above the individual to commission effective and efficient public services. This typically means moving from a situation where providers compete in markets, to one where they compete for markets. But without a consumer in charge, how can we ensure that services are responsive to users’ needs and cost effective? One approach is for government to commission for outcomes.
8
Z ac h Cooper, et al , “ Does h os pi tal c o mpeti ti on i mprov e effi c i en c y? A n an alys i s of th e rec en t mar k etbas ed ref orms to th e E n g li s h N HS’, CE P Di s c us s i o n Paper N o 9 88 (L on d on : L SE , 20 10 ).
42
SOCIAL MARKET FOUN DATION
CHAPTER 4: OUTCOME-BASED COMMISSIONING
As the above chapter makes clear, market-based
service
provision, in the form of genuine user choice and control, should be the first port of call for policymakers for both instrumental and libertarian reasons. But, where it breaks down, we must instead look to a level above the individual to commission effective and efficient public services.
COMPETITION FOR MARKETS When services are commissioned on an individual’s behalf, that offers the possibility that all three of the shortcomings of the choice model can be overcome. The commissioner can: ·
be instructed by government to take account of the interests of other citizens in delivering services to the primary use;
·
be expected to have the expertise and scale to overcome information problems; and
·
operate on a scale necessary to coordinate decisionmaking.
Further, while the consumer model sometimes fails, leading back to a form of top-down provision, market disciplines can remain. Instead we simply move from services characterised (primarily if not exclusively) by competition within markets, where providers seek to provide the best service in order to attract ‘customers’, to service provision characterised by competition for markets. This approach has been evident across all areas of public policy in recent years. Government has put out to tender fixed-
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term contracts to operate everything from prisons and railways, to employment programmes and government office buildings. The theory behind these developments is that by opening up provision
to
a
wide
range
of
possible
providers,
such
contestability will result in reduced service operation costs and/or increase quality. Even where there are relatively few providers in a given market, it is argued, the threat of market entry by competitors keeps service providers on their toes, encourages good performance and keeps costs low. However, there are at least two general problems that recur when government runs contracting rounds for public service provision. These problems go to the heart of the theoretical benefits of a market-based approach to public service delivery. ·
First, there is significant tension between the benefits of competition for markets and the need for investment by delivery
partners.
If
contract
durations
are
short,
contractors will be understandably reluctant to invest in developing their service in expectation of a future return. Long contracts are therefore needed to encourage highquality provision in services that require large amounts of investment. But long contracts deny the static efficiency benefits offered by markets that conform to economists’ perfect competition world. If providers are secure in their contracts for, say, ten years, the competitive threat to their business is some way in the future, which blunts market incentives to minimise cost and improve quality – at least until the next contracting round looms. ·
Secondly, the complexity of service delivery in most areas of public policy is such that the contractual approach on its own tends to have to stipulate highly detailed input
44
SOCIAL MARKET FOUN DATION
and/or process requirements for delivery partners. By focusing on securing the detail of process, government removes the flexibility of providers to innovate. This destroys the dynamic efficiency benefits of markets to try new approaches and learn more effective ways to do things. The tension between short-term contracts offering highly competitive tendering, and longer-term ones providing strong investment incentives is almost certainly an insurmountable trade-off, since the contractual security required for investment is inherently anti-competitive. The announcement earlier this year by Lord Adonis, until recently the Secretary of State for Transport, that rail franchises would be extended to run for 10 years is an admission that the last round of contracts placed too much emphasis on competition and not enough on investment incentives. 9 However, the focus on defining processes does not simply restrict the scope and remove the incentives for providers to innovate. It also leaves decisions about what constitutes an effective public service to those furthest away from service users: policymakers. Nevertheless, despite the information problems associated with this approach, the reasons for the re-imposition of Whitehall control in this way are clear. Accountability for public money necessitates that the centre should dictate what happens with the money. Or does it?
OUTCOME-BASED COMMISSIONING Outcome-based commissioning is characterised as a shift from government paying delivery partners for the processes they complete (regardless of whether they constitute a good use of 9
Pi c k ard , J . an d Pli mme r, G. ‘A d on i s tri es to l oc k i n trai n ope rato rs ’ Fi n an c i al T i mes , 20 Jan uar y 20 10
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public money), to one where it pays for the achievement of desired outcomes. An area of policy in which this approach is increasingly being deployed across the world is that of welfare reform. Under outcome-based employment services, providers are paid by the state for getting people into work and keeping them there. This represents a radical shift from previous systems, which often paid contractors for delivering processes, such as basic skills training classes for jobseekers. Where providers are paid for achieving good outcomes, this approach has two key benefits. First, when combined with payment by results, it offers a mechanism to leverage private investment into public services, on the promise that investors will see a return if outcomes improve – paid for by reduced public spending in the area. Public spending cuts over the coming decade will make ‘spend to save’ reforms impossible to fund unless they draw on private investment in this way. There is consequently huge potential to use this approach to enable private finance to step in as the public sector retrenches. Second, it removes the need for Whitehall policymakers to try to learn solutions to increasingly difficult problems through analytical work, such as what interventions are successful at getting people into employment. Instead, that job and the risks that go with it can be handed to market participants to find out what works on the ground. In recent times, government has increasingly recognised that outcomes for users can be improved when contractors are able to innovate in achieving defined goals. In 2007 the Treasury noted that a good procuring authority should consider using an outcome based specification, to give suppliers, who know more about their business than potential buyers, more scope to provide “innovative solutions to solve the underlying problem
46
SOCIAL MARKET FOUN DATION
the procurement is designed to deal with, rather than deciding what the precise solution should be at the outset.� By only paying providers for getting results, and freeing them up to think creatively about how to achieve them, outcome commissioning offers the possibility of the central financial accountability and front line flexibility. In making that shift, outcome commissioning offers three benefits over standard contracting, which directly address the three ways in which the consumer approach breaks down. Agency problems Since, under payment by results, government pays a third party for the achievement of socially desirable results, there is no longer any concern that the individual will use resources in a way that does not benefit other stakeholders. Hence the agency problems associated with the consumer model are overcome. Second, providers are free to use their understanding from engagement with users to tailor services more closely to individual need. This is not simply a question of allocating spending effectively. Strong incentives to achieve results, combined with process flexibility, encourages front-line staff to maximise the engagement of service users in achieving the desired outcome. In services where co-production is the key to good results, far from displacing service user engagement, outcome commissioning provides an environment in which it can be fostered. In addition to addressing the agency problems that can frustrate the consumer approach, outcome commissioning can also solve another agency problem: that of government. By requiring government clearly to stipulate the results it seeks for a given public service, outcome commissioning can drive a much clearer democratic discussion about public services than is possible under either a bureaucratic delivery model or a
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contractor model in which processes are agreed but outcomes ignored. This has particularly been evident in the debate over ’creamskimming’ of easier clients and ‘parking’ or ignoring of harder-tohelp people in employment services. Recent evidence of this behaviour by private contractors on the Pathways to Work programme has caused concern. 10 In reality, the transparency that contracting has brought has revealed a problem that has long existed under state-delivered employment services – that policymakers continue to direct resources towards those who can be found work with the least money. That transparency of outcome commissioning has stimulated a useful debate around whether that is a desirable or cost-effective thing. Information problems Under the consumer model, the infrequency or complexity of the choices being made by citizens sometimes mean that they have insufficient information about what kinds of services represent good value for money. For example, an unemployed person may never or only rarely have experienced unemployment before and hence be unsure either of the best way to find work, or of where to find the services they need. Such information problems can prevent a market from functioning effectively. Under an outcome commissioning model, service users can be guided by commissioners acting to bring together the necessary services and advise jobseekers of effective strategies for finding work. Commissioners’ relentless focus on what works to get people into employment aggregates the experiences of many
jobseekers
allowing
others
to
benefit
from
that
information, in a way they could not on their own. 10
M ari a Hud s on , et al, “T h e i n fluen c e of outc o me- b as ed c on trac ti n g on provi d er- led path ways to work ” , R es earc h Rep ort N o 6 38 (L on d on : DW P, 20 10) .
48
SOCIAL MARKET FOUN DATION
Co-ordination problems The final stumbling block for the consumer model, identified in Chapter 3, was that of co-ordination problems. Related to the information solution described above, outcome commissioning allows for the necessary level of service coordination without compromising the service-user focus of delivery.
DOES IT WORK? Although measuring outcomes is still a fairly new phenomenon across much of public service delivery, there are some areas in which it has been attempted as a way to improve accountability. On example is in children’s services. Outcomes-based accountability to improve the well-being of children An outcomes-based approach to improving children’s well-being - known in the sector as Outcomes-Based Accountability (OBA) has been introduced in over 40 states in the US and in Australia, Holland, Ireland, Norway and Chile. With the publication of Every Child Matters: Change for Children in 2004 the focus of service planning for children and families in England has also shifted to achieving outcomes as opposed to service outputs. Put simply, outcomes based accountability in the children’s sector is about clearly setting out the overall outcomes being strived for, and determining what quantifiable improvements in children’s welfare and well-being would be required to achieve these improvements. It is about moving away from process measures and delivery targets, and thinking instead about results. Outcome-based accountability uses clear language and is based around three common sense performance measures: “How much did we do? How well did we do it? And is anyone better off?”
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A study commissioned by the Improvement and Development Agency for Local Government (IDeA) examined the early impact of outcome-based accountability and the extent to which it has contributed to changes in culture, planning and accountability. 11 The study selected five organisations (Cheshire County Council, North Lincolnshire Council, Portsmouth City Council, the borough of Telford and Wrekin, and NCH – The Children’s Charity) all of which were in the process of applying the ideas of OBA. The study found that the introduction of OBA improved partnership working as different agencies began to work to a common purpose - improving selected outcomes for children, families and communities. The clarity of the language used and logical process involved in OBA, coupled with the focus on achieving measurable outcomes, led to a greater sense of shared responsibilities. A cultural shift occurred with the development of a sense of shared ownership of problems and a willingness to pool resources. The study also found that the introduction of OBA improved accountability and clarity, as the goal of delivering improved outcomes meant that every intervention had to be shown to be effective. The study revealed that all of the respondents had a “remarkably clear understanding of the importance of gathering data to underpin decision making”. While the five organisations were at different stages in their implementation of OBA the study commented that all of the organisations were “moving towards better and more systemic ways of working as well as developing more accurate awareness of whether services are making a difference to the lives of children, families and communities”. Outcome-based payment in welfare-to-work 11
Collete M c A uley an d Dan i el Cleave r, I mprov i n g s erv i ce de l i ve ry – in troduci n g outcome s - bas e d accoun t abi l i ty (L on d on : IDeA , 2 00 6) .
50
SOCIAL MARKET FOUN DATION
Coupling outcomes with a system of payment by results and competitive tendering is an even more powerful way of ensuring accountability. Outcome-based payments have been successfully used in a number of countries to improve the way unemployed people are helped back into work. In 1998 the Australian government set up ‘Job Network’, one of the first comprehensive attempts to apply market mechanisms to the provision of subsidised employment services. Under this system private sector organisations were free to bid to provide Job Network services and were rewarded for the employment outcomes they achieved for jobseekers. For example, a provider received outcome payments of over $6,600 if it successfully found a job that lasted at least 26 weeks for a job seeker who had been unemployed for 3 years or more. An assessment of the scheme by the Productivity Commission found that the outcome orientation ensured that the objectives were clear, that there were strong incentives for finding better ways of achieving job outcomes, and that cost efficiency was encouraged. The Commission concluded that in Job Network’s first year, the job outcome performance was similar to the previous state-run model. However, with the flexibility to tailor their help to jobseekers, contractors delivered the same rate of job outcomes at significantly lower cost while also achieving greater satisfaction levels from jobseekers and employers. 12 In particular, the Intensive Assistance programme specifically targeted at harder-to-help jobseekers was estimated to have lowered the cost per employment outcome dramatically: it fell from AUS$12,100 in 1995-96 to AUS$5,440 in 2000-01 – a realterms fall of 58.9%. 13 The Commission also predicted that 12
Org an i s ati on for Coo per ati on an d Devel opmen t, “ In n ovati on s i n labour mark et poli c i es : T h e A us trali an way” (Pari s : OE CD, 2 00 1) , 2 0. Prod uc ti vi ty Com mi s s i on , “In d epen d en t revi e w of th e jo b n etwork (M elb ourn e : Co mmon wealth of A us trali a, 20 02 ).
13
Sally C owli n g an d Wi lli am F . M i tc h ell, “ Fals e p ro mi s e or fals e p remi s e? E valuati n g th e job n et wor k ”, A us tral i an Journ al of Labour E con omi cs 6: 2 ( 20 03 ) .
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outcomes would be likely to improve over time as poorer performing Job Network providers exited and as providers learned what works best. In the UK the 2007 Freud Review14 noted the success of programmes
that
have
used
outcome-based
targets:
the
Pathways to Work pilots supported those on Incapacity Benefits through
ongoing
mandatory
contact
with
highly
skilled
providers, who were able to provide quality employment, health and financial support. Compared to non-Pathways areas, these pilots led to an eight percentage point increase in the rate at which people left Incapacity Benefit. Likewise Employment Zones (EZ), where the long-term unemployed are referred to private providers for 30 weeks, paid contractors according to how many people found work. Providers were paid more the quicker they got people into jobs. Evaluations show that the EZ areas outperformed New Deal comparison areas in term of job-starts, although satisfaction with the jobs found and subsequent job retention was lower in the EZ areas. 15 These
examples
highlight
the
power
outcome-based
commissioning to achieve the specified goals. Ongoing debates around exactly what outcomes should be required – particularly over the definition of sustained employment - demonstrate the policy clarity that the approach can bring, as well as the complexities of defining the desirable results of a public service.
14
Davi d Fre ud , “Red uc i n g d epen d en c y, i n c reas i n g opportun i ty : o pti on s for th e futu re of welfa re t o work . A n i n d epen d en t revi ew t o th e D epart men t for Work an d P en s i on s ”, (L on d on : HM SO , 2 00 7) .
15
Jon Hal es et al , “E valua ti on of emplo ym en t zon es ”, (L on d on : N ati on al C en tre f or Soc i al R es earc h , 20 03) .
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AVOIDING THE PITFALLS Perhaps the most common objection to paying for outcomes is that it can lead to ‘cream-skimming’. This is the situation where service providers choose to focus on easier-to-help (and therefore cheaper) service users and ignore the more expensive ones. Where a uniform level of outcome payment is offered, private contractors would not be acting in their shareholders’ interests to do anything else. It is important to note, however, that this is not a phenomenon that is absent in the state sector. Indeed the present welfare-to-work regime in the UK is entirely designed to minimising costs by encouraging the easier clients to move back to work quickly and leaving the hardest-to-help jobseekers without support until later in their claim. Pressure to minimise the costs of the system and reduce the numbers claiming Jobseeker’s Allowance make this approach inevitable. Nevertheless, in the private sector, the problem of creamskimming behaviour is one that stems from the payment structure offered to contractors. However, it is not intrinsic to the outcome payment approach and can easily be avoided if it is deemed to be undesirable by policymakers. One alternative to fixed uniform payments for outcomes is for government departments to undertake statistical profiling of service user in order to assess how costs vary with user characteristics. This information can then be used to guide the outcome payments offered. However, statistical profiling runs the risk of simply hiding rather than eradicating the tendency to pick easier clients and ignore harder ones. Observable characteristics used in profiling, such as education level or age, are only partially predictive of how easy someone will be to stop re-offending or find work. Other unobservable characteristics, such as the motivation of the service user, are at least as important in
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determining the costs associated with the person when coproduction is an important element of service provision. Where contractors are able to assess clients at first hand, the information asymmetry with commissioners in government departments can mean that parking remains but slips under the radar. A more effective alternative to uniform payments involves deploying a graduated payment structure, sometimes known as an escalator payment. This offers an increasing payment per outcome as providers help a higher and higher proportion of their clients to achieve the success outcome. Establishing a payment schedule that saves the exchequer money, while enabling providers to help more people, is a complicated problem. It requires solid data and rigorous data analysis, but is feasible in most cases.
EXPANDING PAYMENT FOR OUTCOMES Given the potential for outcome-based commissioning to cut costs and sharpen the focus of contractors on achieving the desired outcome, what areas of public service delivery might benefit from such an approach? 路
Reducing re-offending. As the SMF argued in a recent paper on this subject payments for reducing recidivism among low-tariff offenders has the potential to join up complicated and disparate service delivery strands. 16 The challenge here will be to ensure that contractors have sufficient
control
over
the
pre-
and
post-release
environments of prisoners to be willing to assume the risks of payment by results. The coalition government
16
Ian M ulh ei rn , et al, Pri s on bre ak (L on d on : Soc i al M ark et F oun d ati on , 2 01 0) .
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plans similar reforms for post-release services as part of it’s planned ‘rehabilitation revolution’. ·
Skills. It has long been argued that the focus on outputs in this policy area – such as the number of people with a Level 2 qualification - has led to a rapid increase in the number of people winning qualifications with little apparent impact on the outcomes that policy might seek to
achieve,
such
as
higher-skilled
employment,
progression in work or retention of employment. This could be changed by deploying a payment by results framework where FE colleges and other providers are paid for delivering measurable improvements in a student’s subsequent productivity. The challenge here is to establish a viable proxy, such as pay and progression. The danger, however, is that these outcomes can be ‘gamed’ to make progression appear to have occurred. ·
Welfare to work. The SMF has consistently argued for expansion of payment by results to include all jobseekers from the first day of their unemployment benefit claim. 17 Doing so would release the full benefits of access of frontline providers to information about jobseekers, rather than requiring them to go through a rigid, centrally determined system.
THE LIMITS TO OUTCOME-BASED COMMISSIONING Despite the potential of outcome commissioning to drive cheaper, more responsive and more effective public services, this approach, as with the consumer model, is no panacea. There are reasons why paying for outcomes, in particular can fail. The three common ones are as follows.
17
Ian M ulh ei rn et al, V i ci ous cy cl e s (L on d on : Soc i al M ark et Fo un d ati on , 2 00 9).
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·
Measuring success: where simple, measurable metrics of success do not exist it is difficult to tie payments to good outcomes.
·
Accountability: where there are too many external influences to reliably link provider interventions to successful outcomes, accountability can be too weak to allow payment by results.
·
Time-frames: when outcomes lie too far in the future for private investors to fund delivery, the approach will not be viable.
1. Measuring success One of the most pressing limitations to government paying providers for outcomes is that of measurement. Some service outcomes, such as stopping re-offending or finding work, are more conducive to clear binary measures than others. Success in other services is often more nebulous. For example, it would be difficult to commission school provision on a simple payment-byresults basis since ‘good’ school outcomes are often hard to define and widely agreed to be much broader than simply exam success. Developing good measures of ‘soft’ or more subjective data is difficult and expensive, if accuracy and reliability are to be achieved. At a more subtle level, even where there are binary measures of success, it is not always easy to capture them. For example, it is impossible for the state to observe someone’s actual reoffending rate: it must instead rely on their reconviction rate to judge success. Finally, when paying for results, there are often risks for government around defining what constitutes success. The starting point for government is to establish a baseline counterfactual: what would have happened in the absence of the
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contractor’s efforts? In many cases this is no small undertaking and requires careful analysis, as explained above. But once the counterfactual has been established, performance above or below the benchmark may not constitute success of failure for two reasons: first, external changes to the environment might alter the counterfactual, for example a recession reducing the rate at which people can find work; second, changing case mix can make it either easier or harder for providers to hit their targets. 2. Accountability Clear accountability is essential if outcome commissioning is effective. This means that unless providers are sufficiently in control of the processes that lead to good or bad results, they cannot reasonably be rewarded or penalised for failing to attain them. Ultimately this means that paying for outcomes can only be viable for broad policy outcomes and where contractors have sufficient control of the environment that generates good or bad outcomes. For example, a basic skills training provider cannot be effectively paid by results when their clients find employment, since there are too many other contributory factors in achieving employment over which the trainer has no control. In areas of policy where a focus on simple and broad outcomes is inappropriate,
outcome
commissioning
is
likely
to
be
unworkable. 3. Time-frames The final category of problems for outcome commissioning in which providers are paid by results relates to the time-frame for payment. Since the approach relies on leveraging private finance into public service delivery, the length of time until results are seen, and hence payments made, determines whether the approach is viable. This means that paying for good adult outcomes, on whatever measure, for children in care (for 57
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example) would involve a very long wait until pay-day for investors in the care system.
WHAT CAN POLICYMAKERS DO IN THE FACE OF THESE FAILURES? Proxies for success There are a number of ways in which the measurement and timeframe problems can be tackled. However, the ever-present risk is that the apparent solution represents payment for partial outcomes, or a return to paying for the achievement of process targets, rather than real, desirable and comprehensive outcomes. For
example,
in
healthcare,
patient-reported
outcome
measures (PROMS) are collected to help inform patients’ choices regarding acute services. Patient perceptions of their own experience are one part of a successful health outcome. But were they to form the basis of financial reward for providers, they would likely skew the focus of health services away from a clinical definition of a good outcome – perhaps nebulous and vague – and presumably resulting in poorer clinical outcomes. Outcome proxies must therefore be carefully considered if they are to avoid perverse results. Interim process targets, such as the ‘distance travelled’ towards employment, are often proposed as viable outcome proxies. By this approach providers are rewarded for helping people, even if the ultimate outcome goal is not met. However, policymakers should be wary of such solutions. By removing the focus from outcomes, such proxies slip back to paying for the achievement of process targets, such as the completion of a basic skills course, instead of that of entering work. This is unlikely to lead to more cost-effective service provision overall because it removes the scope for innovation and the incentives for
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achieving what really matters: good outcomes. Moreover, interim targets should be unnecessary since providers who are good at moving people towards employment should, in aggregate, also prove effective at getting their clients into work. Driving accountability through the system Where accountability problems currently make paying on outcomes unworkable, it is sometimes possible to re-organise service delivery to drive better accountability. For example, the idea of paying prison governors for reducing the recidivism rates of inmates is problematic since they do not have control of the huge range of other public services that we know are integral to reducing re-offending. Instead, were contractors to be in charge of incarceration, health, re-settlement and employment of exoffenders, they could be reasonably held to account for the reoffending outcomes achieved, since they control so many of the factors that we know influence subsequent behaviour. 18 But in some cases, particularly where hard outcomes are difficult to define, outcome based commissioning, and payment by results in particular, are less useful. At that point policymakers must return to consider the range of policy delivery mechanisms that are available when markets are either weak or entirely absent.
18
M ulh ei rn et al, P ri s on Bre ak.
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CHAPTER 5: WEAK OR ABSENT MARKETS
The last two chapters have outlined two powerful market mechanisms for driving more cost-effective public service delivery over the next decade. There is scope for significant expansion of these tools over the coming decade to improve service delivery and reduce costs. But as has been explained the appropriateness of the consumer model or the outcome-based commissioning model of public service delivery depend crucially on the nature of the service in question. Where the outcome commissioning
model
fails
–
either
for
measurability,
accountability or time-frame reasons – it is necessary to consider what options remain for policymakers in environments where only weak market mechanisms are available. This chapter therefore concludes with a consideration of the options available to policymakers to drive performance in environments where the benefits of markets are difficult or impossible to realise.
WEAK MARKETS Despite the potential of more market-based delivery to drive public service productivity over the coming decade, there are many types of public services that diverge significantly from the perfectly
competitive
ideal.
The
consumer
approach
and
outcome-based commissioning are not appropriate delivery mechanisms in all cases. Policymakers should be wary of structures that may superficially resemble markets but do not provide the pluralistic and competitive environment that is needed to deliver static and dynamic efficiency improvements. Where a given service diverges so much from resembling a market, neither the ultimate service user, nor the government
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acting on users’ behalves, has the power to enforce competitive market conditions on producers. This can occur where high levels of up-front investment are required, as with public utilities. This makes it difficult for government to maintain competitive pressure on providers through re-tendering while still making the contracts sufficiently long in duration to be attractive to investors. It can also occur when the individual consumer model fails, for the reasons outlined in Chapter 2, and where outcomes are too nebulous or far off in the future to deliver through a payment by results framework. One example of such a service might be children’s care services. Here, individual choice is clearly unworkable, but ‘good outcomes’ are both multifaceted and, even when measurable, are only evident after many years. Where markets are weak or absent from public service delivery for reasons such as these, it becomes necessary to reconsider the other two means of public service delivery: command and control, and trust models. New thinking in both areas has led to some interesting policy ideas in each delivery approach. How do these compare to market approaches and when might policymakers use them?
CENTRAL CONTROL AND THE ROLE OF ENTITLEMENTS The absence of effective market mechanisms creates problems for driving responsiveness, and therefore cost-effectiveness, in public services. Trust in professional delivery reinforces the gift model of public services. Putting decisions in the hands of producers, however well-intentioned, is unlikely to enhance the responsiveness and innovation of public services.
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Performance management and centrally-imposed targets will remain an essential part of public service delivery in some areas where markets are absent. However, the top-down nature of these approaches makes them particularly blunt tools for improving service responsiveness. Nevertheless, some innovative recent thinking has sought to explore the possibility of augmenting targets, set and monitored in Whitehall, with forms of bottom-up monitoring by service users. Liam Byrne, until recently the minister in charge of public service reform, recently declared that the Government is “developing a strategy that takes public services away from a target culture� instead “giving people rights and entitlement to core public services." It is argued that, where possible, rights will replace targets. The recent Cabinet Office paper Putting the Frontline First set out citizen entitlements such as the right to be treated within 18 weeks, and seen within two weeks, for urgent cancer referrals. 19 In education policy, the September Guarantee for 16 and 17 yearold school leavers entitles them to a guaranteed place in education or training. All of these measures aim to clarify what citizens can expect from their public services and hence strengthen their voice in dealing with providers from either the public, private or third sectors. It remains to be seen how effective the entitlements agenda will be in increasing responsiveness and public service efficiency, and indeed whether the new government will pursue this approach at all. But the principle of bottom-up enforcement of service guarantees may be a promising way to augment central control where real market mechanisms are absent or weak. In an era of public spending cuts, such entitlements may be effective 19
HM Gove rn men t, Pu tti n g th e f ron t l in e fi rs t: s marte r gov e rn me n t (L on d on : HM SO, 20 10 ).
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in safeguarding minimum standards, reducing the variability of performance, if nothing else.
TRUST AND MUTUALS Recently the two main parties have both explored the idea of empowering producers and consumers of public services by setting up cooperatives. The Conservative party has advocated the idea of giving professional groupings the opportunity to deploy their frontline knowledge and assume responsibility for service delivery. On the face of it, at least, the mutuals idea is essentially a trust model, in which power is handed to the front line professionals who are deemed to know best how to use scarce resources. The mutual model has some advantages over both commandand-control and contacted-out delivery models. In situations where services are so complex that either users or commissioners are unable to be able to specify exactly what services they need, professionals are arguably in a better position to determine the allocation of resources at the front line than are distant public sector managers. Compared to a contracting out model, mutuals might have the advantage of being mission rather than profit driven, reducing the risk that providers will simply work to the letter rather than the spirit of the contract with commissioners. However, the mutual model may prove unstable in practice. While it is often the case that those closest to service users understand their needs, that does not mean that providers are unstintingly pursue those needs, for the same reasons outlined in Chapter 2. Where the interests of providers to not coincide with those of service users, and without a choice framework in place,
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dissatisfaction
with
services
will
inevitably
default
to
democratically accountable ministers. The result is likely to be a return to centralised control. Where mutuals do underperform, central government has another alternative to taking service delivery back in house: it could put the contract out to tender. Indeed, opponents of the Conservatives’ plans for mutuals have argued that mutualisation will be a Trojan horse for further contracting out. Insofar as mutuals can be made to be more responsive to users’ needs through the threat of putting their contracts out to tender, this is a good idea. So while the mutuals approach appears at first as a trust model of delivery, mutual providers seems likely to come under pressure from either the threat of competitive tender or a return to in-house control by public providers.
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CONCLUSIONS Over the next decade we are likely to see a radical public service reform agenda develop. As this essay has argued, the approach of policymakers should be a sceptically pro-market one in which the primary tool for delivery is choice and competition. Markets offer improvements in the cost-effectiveness of public services, as they force providers to respond to the needs of users. Competition boosts the chances of new innovations to further improve service quality and cost-effectiveness over time. There are numerous forms that public service reform can take. But the starting point must be the individual service user, through vehicles such as individual budgets and choice. A policy framework that starts with the user would represent a revolution in thinking from the Beveridgean model that has continued to dominate service delivery despite the reforms of the past two decades. Where the consumer model breaks down, as it does in many public services, establishing and contracting for outcomes presents a good second best market solution to commissioning in a range of public services. Thus far the approach has only been deployed in welfare reform, and even here only to a limited degree. The approach should be extended, and other policy areas can learn much from government’s recent experience to widen the application of this commissioning approach. Where individual control is inappropriate and commissioning for outcomes is difficult, policymakers following the market approach are left with the option of weaker market mechanisms of contracted out provision. In these settings information asymmetries and the need for high levels of investment in some services further curtail competitive pressures that are the desirable characteristics of any reform. At this point policymakers 65
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must compare the three delivery routes: would producer-led service delivery, or command and control be more effective than contracted out provision? Where competitive pressures are very weak, there is no a priori reason to imagine that private sector provision is superior to public or third sector delivery. The decision must rest on the nature of the service and where the information asymmetries are least severe. Radical thinking will be required to get more for less from public services over the coming decade. But the ad hoc way in which market-based reforms have occurred in the past must be replaced by a systematic rethink of how services are delivered across the board. Different areas of government have much to learn from each other, but they will only be able to do so once they think about service delivery in the same way. This essay has set out a framework to allow just that.
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Copyright © The Social Market Foundation, 2010
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Public service reform has been on the agenda for years. But in the times of plenty, it has lacked the urgency or coherence that today’s fiscal situation demands. This paper argues that a market-based approach to public service delivery is the basis for public service effectiveness and efficiency over the coming decade. The fitful progress towards greater market-based provision has been piecemeal and lacked a coherent framework to help policymakers to think through the benefits and the pitfalls of different approaches. This paper sets out such a framework to help policymakers navigate the baffling array of commissioning approaches in the delivery of public services to achieve more for less in the lean times ahead.
Social Market Foundation 11 Tufton Street | Westminster | London SW1P 3QB Phone: 020 7222 7060 | Fax: 020 7222 0310 www.smf.co.uk