Hivetec-DES-Report-V1.4

ALIGNING INCENTIVES TO SUPPORT BETTER OUTCOMES
Current Model
Funding Ratios:
60% Service fees /40% outcome fees
Reward is based on higher mix of service fees and a
smaller proportion based on outcome fees.
Unintended consequences “creaming & parking”: the
current funding model encourages providers to focus
on easier-to-place job seekers, rather than more difficult
to place job seekers.
Current funding model may encourage poor jobmatching
and a focus on short term outcomes.
Funding is not linked to participants through pro-rated
fees.
Changes Proposed
Funding Ratios:
50% Service fees / 50% outcome fees
Reward will be more outcome focused; payment for
service activity and payment for results are equally
apportioned
Risk adjusted funding model with competition and
contestability - Pricing Mechanism/Reward and
Performance
Risk-adjusted payments based on key difficulty markers
Risk-adjusted outcome fees should lead to more
investment in hard-to-place job seekers.
Funding will be linked to individual participants through
pro-rating service fees when/if a participant changes
provider.
Implications
1. In the current environment, many DES Providers operate on a loosely defined ‘aggregate cost’ business
models. Broadly, this is determined based on total service fees for the Provider’s market share of clients plus
an estimated percentage of outcome payments for a small proportion of clients. The aggregate cost approach
masks the true cost of service delivery for DES Providers and the cost of delivering a full outcome to a specific
individual. Under the new funding arrangements – with non-guaranteed market share, pro-rated service fees,
and 50% outcome payments – the aggregate cost model is no longer feasible for DES Providers.
2. The new funding model rebalances payment ratios equally between service fees and outcome fees. In effect,
a further 10% of current guaranteed income will now be contingent on performance. Increasing the PbR
(Payment by results) aspect of the contract at 50% of total.
3. Payments are also based on a Participant risk adjusted funding model; DES Providers will receive higher
payments for placing those job seekers deemed ‘hardest to place’. This is designed to encourage greater focus
on hard-to-place job seekers, but presents a significant cash flow risk for DES Providers.
4. Other changes to the payment model will also impact Provider cash flows, increase costs, and tend to amplify
risk. In particular:
• Service Fees will be paid to DES Providers on a pro-rata basis and will be linked to individual
Participants. If a Participant chooses to switch Providers, the balance of the Service Fee will be
transferred to the new Provider.
• The traditional ‘job-start’ fee will be replaced by a 4 week outcome payment, to ensure that
Participants start a job well. Further payments will then be available after 13, 26 and 52 weeks
of employment. Effective Administrative processes will be critical to ensure outcome payment
tracking.
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