Results-Oriented Government: Funding Outcomes, Not Inputs

David Osborne
and Ted Gaebler

What I've noticed about bureaucratic programs is that for all their rules and red tape, they keep very little track of what actually happens to the people they're serving. If that's built in from the beginning--if you keep track of the results--you can dispense with a lot of red tape.

-- Tom Fulton, President of the Minneapolis/ St. Paul Family Housing Fund

Several years ago, the Illinois Department of Public Aid decided to reexamine the way it reimbursed nursing homes for Medicaid patients. It paid according to the level of care provided: for severely ill residents who needed more care, the state paid more; for those who needed less care, it paid less. This seemed entirely logical and fair, but when state analysts finally looked at the results, they were horrified. The overriding goal of state policy was to keep the elderly as independent as possible, so as to minimize costs. Yet the percentage of nursing home residents who were bedridden was rising steadily.

Apparently, by paying more for bedridden patients, the state had given nursing homes a financial incentive to keep them bedridden--and a disincentive to get them up, involve them in physical activities, and help them function independently. Because the funding formula focused on inputs but ignored outcomes, it had produced the exact opposite of the state's intentions.

To its credit, the Department of Public Aid quickly changed its system. It developed a set of performance measures that rated patient satisfaction, community and family participation, and the quality of the nursing home environment. Nursing care managers now visit each institution periodically and rate them, much the way the Michelin Guides rate restaurants. The higher they rate, the higher their reimbursement level: a six-star rating is worth $100,000 a year more than a one-star rating. The state also publishes the ratings, so consumers can choose between nursing homes based on their quality. Illinois nursing homes, in other words, now compete for their customers based on their performance.

Unfortunately, the new system is still the exception. Traditional bureaucratic governments act just as Illinois did before its study. They focus on inputs, not outcomes. They fund schools based on how many children enroll; welfare based on how many poor people are eligible; police departments based on police estimates of manpower needed to fight crime. They pay little attention to outcomes--to results. It doesn't matter how well the children do in one school versus another, how many poor people get off welfare into stable jobs, how much the crime rate falls or how secure the public feels. In fact, schools, welfare departments, and police departments typically get more money when they fail: when children do poorly, welfare rolls swell, or the crime rate rises.

Entrepreneurial governments seek to change these rewards and incentives. Public entrepreneurs know that when institutions are funded according to inputs, they have little reason to strive for better performance. But when they are funded according to outcomes, they become obsessive about performance.

Because they don't measure results, bureaucratic governments rarely achieve them. They spend ever more on public education, yet test scores and dropout rates barely budge. They spend ever more on job training for welfare recipients, yet welfare rolls continue to grow. They spend ever more on police and prisons, yet crime rates continue to rise.

With so little information about results, bureaucratic governments reward their employees based on other things: their

longevity, the size of budget and staff they manage, their level of authority. So their employees assiduously protect their jobs and build their empires, pursuing larger budgets, larger staffs, and more authority.

Why did we ever do it this way? In part, we have Boss Tweed to thank. In their battle against public corruption, the Progressives slapped controls on everything they could. Unfortunately, that meant controls on inputs. At the time, it was not easy to measure results. There were no computers, no calculators, and little experience with performance measurement, even in business. Most tasks entrusted to governments were also fairly straightforward, so performance tended to take care of itself. When government picked up the garbage, delivered the water, and constructed the roads and bridges, the results of its activities were clear to all.

This legacy has endured because the ultimate test in government is not performance, but reelection. Private organizations focus on results because they will go out of business if the key numbers go negative. But governments don't go out of business. Failure in government is not failure to achieve results, it is failure to secure reelection. As one state legislator put it, "Pleasing the voters is our performance evaluation."

Politics focuses on perceptions and ideology, not performance. In ordinary times, politicians get reelected based on how the voters and interest groups perceive them, not on how well their government provides services. Even department heads at the federal and state levels are more politicians than managers. "You learn very quickly that you do not go down in history as a good or bad Secretary in terms of how well you ran the place," wrote Michael Blumenthal, after his stint in President Carter's cabinet. In Washington, "you can be successful if you appear to be successful."

But we are no longer in ordinary times. Today's citizens refuse to pay higher taxes for services whose prices skyrocket while their quality declines. "You're seeing it everywhere," says James R. Fountain, Jr., assistant research director at the Governmental Accounting Standards Board: "a growing frustration among taxpayers that they don't know what they're getting for their money."

As a result, words like accountability, performance, and results have begun to ring through the halls of government. Luckily, we now have the technology needed to make such words mean something. We can generate, analyze, and communicate a thousand times more information than we could just a generation ago, for a fraction of the cost. Fountain's organization, which sets the accounting standards followed by most state and local governments, is in fact redefining "generally accepted accounting standards" to include performance measurement. It hopes to release its first performance accounting standards, for general adoption, by the mid-1990s.In an equally telling sign of the times, President Bush and the nation's governors have adopted a set of national education goals for the year 2000, with specific objectives such as a 90 percent graduation rate and first-in-the-world ranking in math and science achievement. They are developing benchmarks by which to measure each school's or state's progress toward those goals.Not everything government does generates results that can be measured. How would we measure the performance of diplomats in the State Department, for instance? But in an astonishing variety of public activities, entrepreneurial leaders are developing new ways to measure and reward outcomes:The federal Job Training Partnership Act created a system that operates almost entirely on performance contracts: training vendors are paid according to how many people they place in jobs--not how many people they enroll in training.

•	At least nine states now tie their funding for vocational education to job placement rates. In Arkansas and Florida, for instance, an adult program that repeatedly fails to place 70 percent of its graduates in jobs loses its state funding.
•	At the Housing Authority of Louisville, if rent collections fall below 97 percent, or turnaround time for vacant apartments exceeds 14 days, or the "site appearance" falls below a graded standard, the managers are warned. If the problem persists, they are replaced.

Comments

[Ark1061]

I found the section on nursing homes quite facinating. In Florida patients are scored on a rug rate. The higher the score the more money they will receive from medicaid. that higher rug rate will also help determine the length of stay. if there were bonuses for early discharging healthy patients maybe there would be less fraud.

[Cindy DeCrow]

Jack Welch, past CEO of General Electric Company, firmly believed that you got more of what you measured. Measuring results as opposed to inputs makes such good sense, it is hard to imagine why one would ever do it differently. Still, this article was written at least twenty years ago, and these issues are still the primary focus of Mr. Osborne's Public Strategies Group (according to his website).

[Becky Fisher]

Even deeper is the issue of motivation in each of the above scenarios. It makes me sad that money is the deciding factor for so many personal and organizational decisions, including levels of performance. Is there something we can do to encourage people to give their best, at whatever they do, out of personal integrity or pureness of heart and not just because someone with a checkbook is watching? ... I'd hate to think that's an impossible goal.

[Carla Crombie]

I witness patients on disability who resist showing any physcial improvement for fear of losing benefits. Money is a very strong motivator for some to stay "un-well" and for organizations to keep people that way. Funding for outcomes makes so much sense but how do we get around the trap that so many people fall into?

[Ree S.]

Funding is needed to provide the services mentioned in the article. The accountability to provide services that create stability, sustainability, and a better quality of life lies within the hands of the agencies, and those providing the services. Whether it is in a nursing home, school, the welfare systems, health and training. It has to start somewhere and at the grassroots will make the most difference.