Performance-based contracting (PBC) is becoming increasingly attractive to state human service agencies, as a preferred contracting approach over the traditional fee-for-service approach (FFS). PBC incorporates performance measures and makes contract compensations contingent on performance achievements. Under PBC, public managers only specify desired results, leaving contractors considerable discretion to prescribe service methods. In this way, PBC is expected to promote quality services and better outcomes.

Despite of the burgeoning popularity, two issues remain elusive: (1) if PBC produces better performance than FFS, and (2) if so, how to take full advantage of PBC. Indeed, human services, characterized by ambiguous performance and high provider discretion, are considered incompatible with PBC. Ambiguous performance makes performance measures difficult, while high discretion in service process may lead contractors to “creaming” and “gaming.”

This research uses a mixed method to answer these two questions, relying on Indiana vocational rehabilitation (VR) program as a case. At the quantitative side, this study uses a quasi-experimental design to examine the impact of PBC on individual employment outcomes in Indiana over a period from 2004 to 2009, with Michigan as a control. During this period, Indiana, as the treatment group, converted from FFS to PBC in its purchase of VR employment services in 2007, while Michigan continued using FFS approach. After using propensity score matching and difference-in-difference regressions to control for the observed and unobserved imbalances between two states, this paper finds PBC is significantly effective in promoting employment results and shortening time to employment. However, the difference in the areas that are silent in performance measures (working hours and wage) is trivial. It seems that what gets done is what gets measured.

The qualitative aspect of this study, holding a street-level perspective, examines how PBC is being implemented by contractors. Through semi-structured interviews with service counselors and contractors and content review of key documents relating to service contracts and meeting minutes, this part of study “triangulates” with the quantitative finding. Contractors do use their discretions to adjust to the PBC system and produce informal practices in the service process. Contractors do not care much about the areas that are different to measure and thus are implicit in PBC. This finding further calls for relying on relational contracting as a supplement when using PBC as a formal control mechanism. 

Overall, in human services, not all aspects of performance can be clearly defined and measured. Along the full spectrum of the performance of a human service, there are performance domains that are straightforward and easy to capture. But there must be certain performance domains, especially related to service quality and long-term effect, that are elusive to observe and define. The more discretion involved in human service delivery, the less portion of service performance can be clearly captured and measured. The broader the ambiguous portion of performance domain, the less effectiveness PBC could produce as a formal control mechanism, which leaves room for relational contracting to fit in.