Innovative financing mechanisms for levelling up social outcomes

The UK government has stated its ambition to level up the country. To do this, it will need to tackle national inequalities while ensuring value for money.

Download the Innovative financing mechanisms for levelling up social outcomes report

This new report by CIPFA and University of Oxford's Government Outcomes Lab (GO Lab) examines different mechanisms that could be used to put a price on the social value of public expenditure.

Key findings of the report

  • The competing priorities of short-term cost saving and the broader consideration of long-term value-based outcomes can cause challenges for programmes designed to improve outcomes.
  • Current outcome-based pricing is broadly still based on cost considerations, with the payers' budget constraints often acting as a cap on what outcomes can be readily achieved.
  • Other sectors can learn from advances made in healthcare and carbon pricing, such as a market-orientated approach, although applying these insights may be compromised by current budgeting practice for social outcomes and risks inherent in OBCs.
  • Drawing on advances made in climate policy, policy gaps and local priorities can be aligned to explore innovative financing mechanisms to access untapped sources of funding.

Addressing today's pressing policy issues calls for a multidisciplinary approach. By extending the lessons learned to other settings, this report challenges current practices that define "value" primarily in terms of short-term financial savings and explores new financing mechanisms to improve value for money and long-term outcomes.

Advances in healthcare value-based pricing

Pricing that better reflects value to patients has gained widespread adoption within healthcare. Value-based pricing asserts that the price of an intervention should reflect the benefits to patients, health systems and society at large. This method aims to establish an explicit link between price and a broad set of values.

Value in healthcare is found not only in terms of the mortality and morbidity of individuals and populations; it can also be observed in the prevention of backlogs, enabling employment, education and independence and daily activities such as exercise. Rigorous review of clinical and economic evidence can help measure value in terms of health outcomes and their impact on patients and society.

The sector has also seen a new innovative and flexible payment mechanism introduced that shares the risk of uncertain health and economic outcomes between the payer and provider. This method links payment decisions to real-world future performance, enabling the payer quick access to advanced medicine while the provider can avoid front-loaded costs in research due to delayed market entry and is also incentivised to constantly innovate.

Carbon pricing

Although there is an international consensus to reach net zero by 2050, a collective way forward remains challenging. Carbon pricing is an instrument that captures the public costs of greenhouse gas emissions and ties them to their sources through a price on the amount of carbon emitted.

Damage to crops, flooding, droughts and heatwaves are all costs that need to be paid for. These added prices applied to the source are designed to reduce emissions and spur innovative technology that produces less carbon.

Estimating the monetary value of a tonne of CO₂ is complex. Calculating the cumulative social costs because of the emission, over an extended timeframe, requires many assumptions and qualitative judgements.

Emissions trading systems (ETS) are one example of how carbon pricing can be made transparent and standardised through a market-based approach. Companies with lower carbon costs can sell their permits to other companies facing higher costs, which minimises the overall burden of curbing emissions. With this method, the market effectively sets the price for carbon and adjusts it in real time.

Outcomes, not outputs

Following the pandemic there is a renewed focus on policy outcomes, rather than policy outputs. Outcomes-based contracts (OBCs) are now seen as a viable way to commission public services, as they consider a wide spectrum of metrics to measure value against.

However, this new way of commissioning has brought new challenges for policymakers who need to deliver best value with often limited funds. Putting a price on these social outcomes is notoriously difficult — value tends to be subjective. The price of an outcome should strike a balance between value to the payer and cost to the provider.

Levelling up

The government's levelling up white paper introduced six capital frameworks that align to multiple dimensions of value. These include metrics such as education, access to green spaces and healthcare, the local environment and investment in innovation — more than a traditional financial return on investment. If the UK government is to achieve its ambition of reducing inequalities, then measuring the outcome, or value, of a policy against these frameworks will be a key driver.

The increased interest in OBCs has nonetheless yet to be translated into specific frameworks for the closer alignment of prices and values. According to a recent survey of practitioners, cost considerations are still being prioritised over decision-making and pricing practices based on social value.

There may be reluctance to fund activities that are unlikely to bring financial reward in the near term. Funding and resources to support public policies to level up will likely remain constrained – meaning that trade-offs will be inevitable.

Although there are significant challenges and obstacles to value-based pricing, there have been advances in the healthcare sector and in climate change policies, both of which are key to levelling up regions.