Not too late to accelerate

28 October 2016

Earlier this month, the ‘Umbrella Agreement’ for the Work and Health programme was released. This lays out, very broadly, the design of the programme, allowing potential service providers to decide if, and under what terms, they will register a delivery bid. Those successful in this initial bid will be appointed to a ‘framework’, after which they will compete for delivery contracts.

The Prior Information Notice (PIN), released in April, indicated that the funding envelope for the programme is around £120 million per year. Crucially, what the Umbrella Agreement adds is that the country is to be divided into six ‘contract package areas’ (CPAs), and up to five providers will be appointed to the framework for each CPA. However, the Umbrella Agreement provides no information on either the number of providers that will win delivery contracts – and thus, the size of each contract – or any details of the payment model. It is timely, therefore, to revisit our recommended payment model, to explore how it can be applied accounting for recent developments.

In Stepping up, breaking barriers, we described how the payment model of the Work Programme had failed to provide sufficient incentives for providers to work with those furthest from the labour market. To address this problem, we recommended a sharpened version of the ‘accelerator model’, under which providers would be paid incrementally higher payments as they move further into their cohort. An illustrative example was produced.

The illustrative example in Stepping up was based on an average payment per job outcome of £4,000 and offers providers nearly £20,000 per outcome for the very hardest to help – though the report was clear that DWP should work with the market to decide actual payment levels. Comparable funding levels would be possible for the Work and Health programme if, as we also recommended, there was a return to the AME/DEL switch. By funding the programme with the money that would be saved by moving claimants off benefits and into work, this model would allow funding to be substantially increased in a way that is fiscally sustainable.

Sadly, the PIN indicates that the Government has, misguidedly, committed to a fixed and significantly reduced funding envelope. Based on projected participant flow, the Learning and Work Institute have estimated that this will provide an average of only £1,500 per job outcome. Taking the Home Counties CPA as an example, using participant volume forecasts and assuming, for sake of argument, that there will be two service providers in that CPA, the below indicates the payment levels and job outcome targets a provider would face if the Government were to implement the example in Stepping up within the allocated funding envelope.

The lower funding neuters the ability of an accelerator payment model to offer large financial rewards for providers that move deep into the cohort. As the graph shows, applying our example payment structure under the Government’s funding constraints offers providers little over £7,000 per outcome at the very top end. Given the reduced funding envelope, it is anticipated that the primary focus of the new programme will be new and existing incapacity-related benefit claimants with moderate conditions – i.e. those in the Work-Related Activity Group rather than the Support Group. Since similar claimants were parked in the Work Programme – where they carried payments of up to £6,500 – it seems unlikely that the above model would provide sufficient incentives to significantly reduce parking.

Nevertheless, an accelerator model could still minimise parking in the Work and Health programme, even under the proposed funding envelope. To compensate for lower funding, the contract should be ‘back-loaded’ to an even greater extent than was suggested in Stepping up. This would mean not paying providers for participants who move into work first and are therefore, by definition, the easiest to help. As an example, the below suggests no payment for the first 20 per cent of the cohort to find work. By doing this, providers could still be offered nearly £10,000 per outcome at the very top end – significantly sharper incentives than under the Work Programme.

Clearly, withholding substantial payments until this far into the cohort reduces the provider’s initial cash flow, which could deter providers from bidding. However, Stepping up also recommended a return to up-front ‘attachment fees’, so long as providers could not rely on them alone to stay afloat, which would help mitigate this problem.

The size of the contracts are anyway likely to be such that small providers – for whom cash-flow issues would be particularly acute – are precluded from being primes. According to the Umbrella Agreement, a maximum of five providers can make it on to the framework for each CPA, and the result of the second round of competition is likely to be that at least two providers are unsuccessful. Otherwise, there would be little value in conducting the second stage. This means there are likely to be at most three providers in each CPA. Assuming three providers per CPA, total programme funding of £120 million per year would make the average annual provider contract around £7 million. As Reform noted in The Work and Health Programme: levelling the playing field, companies are poorly placed to manage contracts worth more than 50 per cent of existing turnover. Hence, providers delivering the Work and Health programme are likely to have an annual turnover at least £14 million, making them financially robust enough to weather the initial lack of cash flow associated with the revised accelerator model.

By detailing the CPAs and the number of providers that will be admitted to the framework, the Umbrella Agreement casts light on how an accelerator model might operate in the Work and Health programme. Even with a fixed and reduced funding envelope, the model should be adopted to prevent parking. But the need for it to be back loaded is even greater if it is to provide the sharpened incentives crucial to its success – and thereby have any real impact on the woefully low levels of disabled people in employment.

Ben Dobson, Researcher, Reform



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