Research and analysis

Summary: Effective contracting of employment and health services

Published 7 October 2024

1. Context

Robust, quantitative evidence to determine the costs and benefits of contracting out employment services and health assessments and comparing these models to no provision or to traditional, in-house delivery by Public Employment Services (PES), is relatively scarce. In addition, existing studies do not allow us to fully understand why contracted services performed well (or not so well), if and how this differs according to context and contract design. As a result of this, evidence is also limited on how the process of contracting out could be improved to achieve better outcomes for individual clients, while keeping the costs of service reasonable for the public purse.

This study, commissioned by the Department for Work and Pensions (DWP) and conducted by RAND Europe, synthesises findings from the existing literature and qualitative interviews with commissioners, providers and other experts, to address the question:

What are the advantages and disadvantages of contracting out public employment services and health assessments and what is the optimum model for doing so?

This main question agreed with DWP captures a number of specific issues explored in this report around contracting employment services and health assessments. These two types of services represent different contracting models in the UK:

(i) payment by results (PbR) contracts feature prominently in employment services (these were temporarily replaced with Cost Plus contracts introduced in response to the COVID-19 pandemic)

(ii) payment for service contracts are commonplace in health assessments.

The reviewed evidence focuses primarily on contracts utilising PbR mechanisms, which are common in the commissioning of employment services in the UK and internationally. There were no international examples of commissioning health assessments in the reviewed literature. This is reflected in the research findings but where possible and relevant, other contract models are discussed.

2. Findings

Contracting out allows to better adjust the volume of service provision to labour market conditions, and – at least in theory – to better tailor services to the clients’ needs by using specialised service providers (empirical evidence is discussed below). We found that PbR contracts in employment services may bring benefits in terms of programme efficiency and value for money. However, there is mixed evidence on the impact of PbR contracts on programme effectiveness: some studies find that PbR contracts for employment programmes are associated with cost savings, whereas this appears not to be the case for other programmes. The main costs associated with PbR contracts are linked with undesirable behaviour from providers such as creaming and parking (i.e., focusing their efforts on job seekers who are deemed closer to the labour market). Contracting out may also weaken the accountability of public services.

We examined risks associated with PbR contracts and found that, for commissioners, these risks include overpaying for services, underpaying and market failure. For providers, the risks are high upfront costs, underperformance and reputational concerns. In addition, contracting out may incur a risk of variable service provision for users/beneficiaries.

The process of contracting out is determined by specifications issued by the commissioners. This documentation formulates expectations of the purchaser towards the service provider(s), and it defines, and governs responsibilities and rights among the parties. Such documentation can attempt to regulate every aspect of services to be provided or leave some (or most) aspects in the provider’s discretion (black box). Compared to detailed specifications, black box provision is intended to allow providers greater flexibility and facilitate innovation, but there is little empirical evidence this actually happens (see more below). Flexibility for providers results in greater service variability and may increase the risk of creaming and parking. Minimum service requirements are designed to assure basic service standards, but views are divided on the optimum level of specification.

In the UK, DWP commissions employment contracts to one or more (prime) contractors across geographical regions known as Contract Package Areas (CPAs). These prime contractors manage a network of subcontractors delivering services in the area. We found that the prime model of contracting builds long-term relationships with large contractors who can take on the risk of a PbR contract. However, there is a risk of subcontractors not being able to benefit fully from contracts. The number and size of CPAs differs across programmes, but large CPAs may mean that providers lack local expertise.

Criteria used to select providers for contracted out services often combined quality and price. In the examples identified in this evidence review, the weight of price relative to quality ranged from 20% to 40%. The quality aspects usually aim to capture relevant experience and expertise. The approach using the Price per Quality Point (PQP) metric is relatively new and it has not been discussed in the reviewed literature.

There is little evidence on how different types of contracts influence market competition in the short- and long-term. However, there is some evidence on the effect of contracting out on market competition: this evidence points to some providers being ‘pushed out’ or forced to adapt to secure contracts and deliver services. The dominance of prime contractors in the market has been well established.

Trade-offs between optimising short-term and long-term outcomes has been a process of ‘trial and error’ in the UK and internationally. One of the key challenges is finding an optimal balance between upfront fees and outcome payments to create incentives for providers and savings for commissioners. In the examples identified in this evidence review, the proportion of payments linked to outcomes varied markedly by country and by programme ranging from 30% (e.g. CareerCompass and CareerAdvance in the US) to over 90% (e.g. the WP in the UK).

While contract management is critical for ensuring the quality of service provision, there is no agreed definition of service ‘quality’ or how to measure it. Performance measurement and monitoring aim to encourage innovation and limit gaming.

Incentives to encourage collaboration or information sharing among providers are limited. There is little evidence on sharing contract resources amongst providers and other stakeholders. Expertise and specialist knowledge of providers is key and the need for professional development of staff was noted.

Innovation in employment services may mean a variety of things including working with a new client group, introducing new forms of support or training or making organisational processes more efficient. Competition intends to encourage innovation and this needs to be considered early on in the commissioning process. However, evidence for innovation taking place in PbR contracts is limited and the reviewed literature points to opportunities for innovation often not being taken up.

3. Conclusion

Optimum contract design will depend on the aims and objectives of the programme, meaning it is not possible to draw overarching conclusions about the ‘best’ approach. There may be tensions and trade-offs between objectives associated with different elements of contract design. Multiple external factors may also affect delivery (e.g., economic performance throughout the contract duration may make it easier or more difficult for providers to achieve targets set up at the start). While there is no single recipe for a flawless PbR contract model, the evidence base is growing. The table below outlines main features of PbR contracts, associated levers through which their features could be optimised and how these levers may lead to adverse effects elsewhere. This framework may help commissioners better understand these dependencies and allow them to make better informed choices suited for their needs.

3.1 Optimising PbR contracts to achieve the desired outcomes

Benefits, costs and risks in PbR contracting	Assumption	Lever	Associated negative effects
Benefit: improved effectiveness and cost-efficiency	Focus on outcomes drives better results (‘what gets measured, gets done’).	Increased weighting for outcome payments.	Gaming behaviour by providers. Disadvantaging specialist providers / subcontractors by primes.
Cost: high transaction costs	Reducing costs of commissioning through PbR increases VFM to commissioners.	Less detailed contract specifications (black box). Fewer minimum service requirements. Longer, fewer and bigger contracts.	Variability in service provision. Deteriorating service quality. Reducing market competition.
Risk: gaming strategies	Reducing incentives to gaming minimises risks and costs to commissioners.	Differentiate outcome payments by client group. More minimum service requirements. More detailed contract specifications (grey box).	Limiting flexibility of providers and potential for innovation.
Risk: primes’ monopoly	Market competition stimulates greater effectiveness and cost savings for commissioners.	Smaller CPAs or two-stage competitions within existing CPAs.  Shorter contracts. (Financial) incentives or contractual requirements for primes to work with smaller providers.	Increased costs for commissioner.
Risk: quality of services	Safeguards must be in place to ensure service users receive high quality provision.	More minimum service requirements. Strengthening monitoring arrangements or introducing a licencing / accreditation system. Strengthening enforcement or breakout clauses.	Increased costs for commissioner. Reduced incentives (increased costs) for providers.

More evidence is needed on health assessments (both internationally and in the UK) to better understand the state of play in contracting out these services and possible ways forward.

Stronger evidence on the actual costs incurred and benefits achieved of different models of provision (in-house, contracted out (including PbR, Cost Plus and payment for service contracts), partnership, grant funding arrangements) is needed to be able to compare these. On that basis it would be possible to draw more informed conclusion on which works better for whom, under what conditions, and why.