The traditional methods that government uses to pay for social services provided by nonprofit agencies have the tendency to create problems and perverse incentives. When contracting nonprofits to carry out social services, two methods have typically been employed. The first was lump sum grants in which a particular department could give a certain size grant to a nonprofit to complete a certain task. The other method was hourly billing, in which the nonprofit actors were paid by the hour to carry out social work. The problem with these methods is that they provided no concrete incentive towards substantive outcomes.
Government departments couldn't use a contract that required the constant assessment of results because it would involve a serious delay in payment that most nonprofits could not withstand. In Oklahoma, the Department of Rehabilitation Services (DRS) attempted to create a system which used incentives to achieve the desired outcome for its customers with disabilities in the most cost-effective and timely way. The Milestone Payment System (MPS) was the result. MPS creates financial incentives through multiple levels of payments, based on increments of pre-defined outcomes. Rates are negotiated with vendors in advance based on the severity of the given individual's disability. In this way, MPS pays nonprofits for their outcomes rather than their time.
DRS staff devoted significant effort to developing a realistic operational definition of the outcome of each service, which could be subdivided into incremental outcomes or "milestones" that are tied to payment. Critical to the success of this system was the consensus and collaboration of Oklahoma's service vendors. At the end of the process, MPS was setup in several frameworks. One example is a six milestone payment structure in which DRS is trying to help a disabled customer find employment. Varying percentages of payment would follow the completion of steps such as the determination of customer needs, vocational preparation completion, job placement, and four weeks of job retention.
MPS is part of a wave of service delivery methodologies making the switch to emphasizing outcomes instead of processes. By combining the input of customers, vendors and agencies with incremental assessment, MPS has become a system of self-correction. Vendors have reported increases in the efficiency of their operations as the direct result of outcome-based payments and frontline agency employees report a reduction in their workload because on the lessened need for hands-on regulation. MPS has begun to shift energies towards constructive process corrections and away from their former platform of regulation.