Looking Ahead: What Role for Performance-Based Contracting

1. Looking Ahead: What Role for Performance-Based Contracting Fred Wulczyn Research Fellow, Chapin Hall for Children University of Chicago

2. Trends In The Private Sector Are Being Prompted By: • The same things that have always prompted change • Scarce resources • Growing awareness of the gap between what we say and what we do

3. Scarce Resources • Government budgets • We can only expect small changes in covered populations and covered services • More likely to see changes in reimbursement mechanisms

4. The Gap Between what We Say and what We Do • In the U.S. • Federal outcome reviews - CFSR • State pressures are being passed onto the private sector • Government has discovered that there are REAL differences in provider performance

5. How is this Affecting Providers? • Structural changes in the market place - viability • Investments in information technology to monitor outcomes • Increased use of performance based contracting • Growing demand to use evidence-based practices

6. Performance-Based Contracting • What is it? • Why are governments interested? • What does a good deal look like? • Should I be on-board?

7. PBC - What is It? • The idea of a performance based contract is not new. Contracts with the private sector have always carried expectations. • What is different is the specificity of the expectations - the performance • The shift underway moves contract language away from inputs (e.g., service units) or enrollment and towards outcomes • Public child welfare agencies are increasingly interested in purchasing outcomes as opposed to services.

8. Why the Interest? • Reflects general trends in the field - public child welfare agencies are using the same lens being used to scrutinize their performance • Reflects the understanding that there is variation in ‘provider’ performance • When focused on outcomes, PBCs address the unfavorable dynamics in the fee-for-service system • Provides a context for increasing flexibility in the use of funds

9. The Fiscal Dynamicsin Fee-for-Service Systems • When providers are reimbursed on a fee-for-service basis, getting better costs money in two ways • The money the agency has to invest in improving services • The money the agency loses because they become more efficient. This is the disincentive in the current system.

10. Designing a Performance Based Contract • What performance do you care about • Reinvestment - what is flexibility? • Creating the baseline • Risk sharing - risk adjustment • Cash flow vs. revenue • Upfront investment

11. Flexible Funding • The child welfare system is saddled with categorical funding • Performance based contracting is one way to increase provider discretion over the use of funding • All of this, however, depends on how you design the system

12. Performance • What does the funder want to buy? • Enrollment • Services • Outcomes • Given the answer is outcomes, which outcomes? • Permanent exits- Reunification, Adoption, Guardianship • Non-permanent exits - runaway, etc. • Placement stability • Reentry • Well-being

13. Reinvestment and the Connection Between Finance and Outcomes • This question has to be asked? • What do you want to do with the “unexpended” foster care funds that are no longer needed? • A reinvestment strategy keeps those funds in the system • For all agencies, reinvestment is very important, but it is especially important for agencies that are less efficient

14. Creating the Baseline • Baselines are based on historical outcome patterns • Performance based contracts are designed to improve outcomes. The question is: Better than what? Better than used to be true, which is the baseline. • Good baselines are risk-adjusted. This addresses the “My kids are different” objection that frequently arises • Revenue is linked inextricably to the baseline

15. Risk Sharing • Baselines are a projection about what will happen in the future. • If revenue is connected to the baseline and the baseline is wrong for some reason, then expenditures and revenues won’t align. • Oops won’t work as an answer. Partners need to know how the risk will be handled. This is risk sharing. • The risk sharing has to be explicit - another reason why the baseline is so important - the baseline clarifies the source of the risk and opens the options for sharing risk.

16. Cash Flow and Revenue • Shifting away from fee-for-service breaks cash flow away from revenue • Revenue is identified at the outset and the policy question is - How do I put the cash in the hand of the provider? • Choices: • Prospectively vs. retrospectively vs. embedded • Fiscal estimates have to be for multiple years

17. Upfront Investments • Starting the improvement process takes investment. Do you want to seed the process with money at the outset? How much? How does this strategy relate to reinvestment?

18. Concluding Thought • There is a tendency to focus on the “money” when negotiating a performance based contract. But . . . • The most important thing you can focus on when planning a performance based system are interventions - best practices - that produce better outcomes children and families. • More money and greater flexibility don’t mean anything if you don’t know what to do with it!!