The Government’s plans to introduce ‘payment-by-results’ into the probation system risk backfiring because their proposals mean that private and third sector organisations are in danger of losing money if they try to cut re-offending, new analysis finds today (Friday 9 August).
The analysis by the Social Market Foundation examines new proposals to open up probation services to non-state providers in 21 contract areas across the UK, looking how the Government’s proposed payment mechanism will work in practice. Under the draft plans drawn up by the Ministry of Justice (MoJ), a proportion of the contract value will be paid to providers on a ‘payment-by-results’ basis, which is intended to reward reductions in reoffending and encourage innovation.
But, using financial modelling of the MoJ’s recent proposals, the SMF finds that the Government’s desire not to pay for statistical ‘noise’ has turned the incentives on providers upside-down. The result is that spending money on reducing reoffending could leave providers worse off than if they had spent nothing at all.
The think tank’s analysis finds that, on generous assumptions, providers would have to seek to achieve around a four percentage point reduction in reoffending to be moderately certain of making any money at all. Targeting smaller improvements would result in financial losses. By contrast, cutting costs and allowing reoffending to increase by up to three percentage points would be more profitable. This is because of a “flat payment zone” built into the mechanism to protect the Government against accusations of paying for apparently good reoffending outcomes that are in fact the result of a statistical fluke. The SMF finds that these negative performance incentives could be even higher in small contract areas.
SMF Director Ian Mulheirn, author of the paper, said:
Payment-by-results in reoffending makes a lot of sense in principle and many elements of the Government’s proposed scheme are good. But their payment proposals look set to wreck the financial incentives that providers and investors need to make this scheme work.
By designing the system with a flat payment zone the Ministry of Justice has effectively made it all but impossible for providers to achieve results good enough to get paid, without investors taking on impossibly high financial risks. The result will be that they simply won’t try.
On these plans providers face incentives to cut frontline costs and allow reoffending rates to creep up. If they are implemented the scheme will reward failure and penalise success. Doing so would be setting the scheme up to fail for victims, taxpayers and offenders.
According to the think tank, although the Peterborough and Doncaster pilots of similar schemes appear to have reduced reoffending, there is little evidence to give providers confidence that they will be able to achieve the exacting standards required to get paid under this scheme. The SMF says that this is particularly the case since the level of resource available in the proposed scheme is likely to be lower than in the Peterborough pilot.
The Social Market Foundation proposes a number of changes that could radically improve incentives on providers, including removing the flat payment zone.
Notes to Editors
- The SMF’s analysis examines the Ministry of Justice Payment Mechanism – Straw Man document, which can be found at http://www.justice.gov.uk/downloads/rehab-prog/payment-mechanism.pdf
- The SMF welcomes many of the proposals, which draw on previous SMF analysis in the 2010 publication Prison Break.
- The SMF develops innovative ideas across a broad range of economic and social policy, champions policy ideas which marry markets with social justice and takes a pro-market rather than free-market approach.