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Sustaining the Momentum for Performance-Based Funding: Incentivizing Innovation in the Public Sector

By: Sean Tennerson

Posted February 12, 2015 on Funding for Results.

If, like me, you follow social impact trends, then you’ve probably been hearing the buzz over government “pay for success” or “pay for performance” models in recent years. Performance-based funding, defined as funding based on the purpose and quality of work to be performed as opposed to the manner in which work is performed, is nothing new. The Government Performance Results Act of 1993 introduced performance-based contracts (PBC) more than 20 years ago, a mechanism being used by governments around the world to improve social outcomes from child welfare to workforce development.

What is new, however, is the increasing popularity and support for outcomes-focused programs like Pay-for-Success (also known as “Social Impact Bonds”), and Performance Partnerships, that are emerging at all levels of government. The renewed sense of urgency and excitement for this approach to public sector reform is almost palpable. Government leaders with a drive to maximize results are redeploying limited resources to invest in solutions that can tackle our largest, most persistent social challenges – access to quality health care, reduced rates of incarceration and recidivism, and universal early childhood education, to name a few. And, most importantly, these decision makers are calling for interventions that leverage flexibility and innovative financing mechanisms to experiment with program designs that can achieve measurable outcomes and produce longer-term impact.

Growing enthusiasm for outcomes-based initiatives is linked to several current trends. The recent economic recession, for example, has focused policymakers and advocates on the effective use of government dollars and raised demand for social programs that make the most of limited taxpayer resources and demonstrate real results. Former President George W. Bush and President Obama can be credited with advancing performance-based and evidence-based policy on the federal level. There’s also the growing influence of Millennial generation professionals who, according to the 2013 Millennial Impact Report, value evidence when committing resources to social good work. Add to these factors the rare bipartisan support for performance-based financing, with notable efforts from Representatives Delaney and Young and Senators Bennet (D-CO) and Hatch (R-UT), and we can see why these models are making headlines. Whatever the motivation, it is imperative that we sustain the momentum for outcomes-based funding.

Performance-based funding is proving to be an effective tool for creating environments that reward creativity and results-based solutions. As governments at the federal, state, and local levels begin to shift focus from paying for the number of services provided to paying for results, they are incentivizing the development of social interventions with innovative models for a more effective public sector. When incentives are aligned with results, government and service providers are held accountable for delivering the outcomes communities need, and providers are rewarded for innovation that leads to greater efficiency and performance. This focus on outcomes makes so much sense, and yet, after more than two decades, paying for performance is still in need of additional support.

Around the US, government and community partners are developing performance-based contracts, illustrating how regional governments can empower service providers and stimulate improvements in underperforming nonprofit organizations and public agencies. Two states, Missouri and Tennessee, are leading innovative child welfare programs and achieving significant results.

Missouri is using PBC to help children move from out-of-home care to permanent homes. According to the Quality Improvement Center on the Privatization of Child Welfare Services’ July 2009 report, Examples of Performance Based Contracts in Child Welfare Services, the state’s PBC model is achieving better outcomes compared to previous years by successfully finding long-term home placements for a higher percentage of children in the system. Instead of paying individual providers, the new model disburses government funds to provider consortiums. The consortiums allow providers to improve on what they do best, and encourages service organizations to support, rather than compete, with their peers. By redesigning its payment structure, the State of Missouri has encouraged greater collaboration among service providers to find better solutions for its children.

Moving one state east, Tennessee is also leading the way in using performance-based contracting to transform child welfare systems. In 2013, the Federal Reserve Bank of San Francisco released Making Performance-Based Contracting Work for Kids and Families, which shares the perspective of a Tennessee-based service provider, Youth Villages. The report highlights the dedication of nonprofit and for-profit service providers who work on tough issues in vulnerable communities, and the role that performance-based funding can play in turning that dedication into innovation. The Beeck Center’s report, Funding for Results, also highlights the state’s efforts to revamp its foster care system. Founder and CEO of Youth Villages, Patrick Lawler, and strategy director, Jessica Foster, explain how their organization was able to reinvest their performance “reward” funding to increase their capacity and innovate on their services:

We have invested in evidence-based practices […] to provide the most effective treatments to the youth we serve. And key tenets of our model – including smaller caseloads for each counselor; stronger supervision and clinical consultation; and a data collection and analysis system that lets us monitor performance, outcomes and customer satisfaction – are far beyond what our government funders ask for but have been critical to achieving our outcomes.

Youth Villages, and other organizations like them, have thrived in performance-based contracting systems that reward providers for finding new solutions to better serve communities. More over, the budgetary implications of this contract are neutral – limited government resources are being put to work, innovatively, for greater impact.

It is exciting to see traditional, government services addressing unemployment, education,homelessness, health, and child welfare with innovative, outcomes-based approaches. One of the challenges we face in sustaining the momentum for performance-based policy is fear of experimentation and the accompanying risk and potential for unsuccessful pilot programs. However, for communities facing persistent social challenges, we must compare the risks of continuing to direct funds to potentially ineffective programs, with the potential, through performance-based funding, to discover and promote service providers that can prove their impact. Now is the time to seize on that momentum and foster innovation and experimentation, because 20 more years is far too long to wait for solutions to our nation’s greatest challenges.

Sean Tennerson is the Program Associate who contributes to the Case Foundation‘s social innovation efforts. Her favorite thing about her role is building relationships with grantees. You can follow her on Twitter @tennersonsean.

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