Performance-based contracting consists of four major activities: preparation of the request- for-proposal and subsequent contracts; measurement of service outcomes, including selection of the specific indicators by which the contractors’ performance will be judged, the data collection sources and procedures to obtain that data, and the timing and frequency of such measurements; establishment of methods for determining payments (or other rewards and penalties), such as the basic price and future price-index adjustments (for multiyear contracts); and reporting of the findings on each service provider and each facility (or each office).6
Listed below are the incentive strategies that Minnesota’s Department of Human Services proposed to use as of January 1999 for its performance-based contracts for nursing facilities.
6Adapted from pages i and ii of “Nursing Facility Performance-Based Contracting and Sunset of Rule 50,” Minnesota Department of Human Services Continuing Care for the Elderly, January 1999.
FOR SERVICE AGENCIES THAT ARE TO
The very best Use as a mentor Pay bonuses
Give special recognition Good Encourage improvement
Use as a mentor Pay bonuses
Acceptable Encourage improvement Poor Demand improvement
The very worst Fast-track to improve or to remove from the program
Source: “Nursing Facility Performance-Based Contracting and Sunset of Rule 50,” Minnesota Department of Human Services
Based on the examples listed above, we make the following more detailed recom- mendations for state agencies and legislatures for implementing performance contracting.
R E C O M M E N D A T I O N : When initiating performance contracting for a service, state agencies
should obtain input from providers to help the agencies identify client outcomes and associated out- come indicators to be included in future contracts. The state should develop a core set of outcome indi- cators and data collection procedures that can be used for contracts in each particular service area. These outcome indicators should be linked to the program’s own outcome indicators.
The state agencies should also obtain input from providers on the design of payment schedules in order to make the incentives fair to providers as well as to the state. This will make the outcome data obtained more reliable and will educate providers in the new procedures, helping to allay their worries about the process.
R E C O M M E N D A T I O N : State governments should provide training and technical assistance to
state personnel and to the provider community on the performance contracting process.
R E C O M M E N D A T I O N : States should attempt to gain commitment and trust from providers by
including a hold-harmless clause for the first year.
R E C O M M E N D A T I O N : States should require providers to submit needed outcome information
(the information called for in the performance agreement) to the state. These data should be subject to state audit. Outcome data should be used to produce the outcome indicators and should be reported back to providers regularly (perhaps quarterly) on their performance and how it compares to that of similar providers. (See exhibit 3 for an example of such a report; it compares public [county] providers rather than private ones.)
Provider should include explanatory information when appropriate. Consistent communication and feedback on performance help promote accountability and maintain provider motivation.
R E C O M M E N D A T I O N : States should use past performance as a factor in deciding future
awards. Performance should be evaluated at the end of each contract, and these evaluations should be properly documented. Contractors should be given the opportunity to provide a written disagreement for the contractor’s file.
To make this process effective, the executive branch should establish central collection of the evaluations and contractors’ responses, possibly a computerized database with files for each contractor. (There may be some difficulty maintaining such a database, since contractors sometimes change their names.)
Surprisingly, past performance has not often been an explicit criterion for choosing providers in government contracting, at least not until recently. State procurement legisla- tion may preclude this in some states. To avoid legal battles over the use of data on past performance, state agencies will need to be able to document the performance levels achieved by providers as compared to the targets included in their performance agreements.
R E C O M M E N D A T I O N : Whenever targets are not met, providers should be asked to provide
R E C O M M E N D A T I O N : With performance contracting, state agencies should consider providing outcome information to the public (particularly the customers of the particular services) so that the state agency and its service providers will be motivated to continually improve service quality. Such informa- tion will be particularly useful to customers who can choose which office or facility to use. However, even if the customer has no such choice, the motivational value of making the information public is likely to make this step worthwhile.
R E C O M M E N D A T I O N : When a major state program begins to use performance contracts, the
agency should standardize contract terms and formats and provide training to help providers under- stand them. Because providers may provide services to more than one division within an agency or to more than one agency, performance contracts should use consistent, standardized language.
The following chart summarizes actions that were used by the five state agencies whose performance contracting activities were described above.