Charities will be encouraged to play a role in government schemes to rehabilitate offenders, under plans due to be set out in the New Year.
Justice Secretary Chris Grayling told the Commons: "I intend to apply payment by results to the majority of rehabilitation work conducted with offenders in the community.
"This rehabilitation revolution will stimulate innovation and open the delivery of services to a wider range of providers with the skills needed to change the individual's behaviour and reduce offending in the future."
He said he aimed to extend the schemes to those sentenced to less than 12 months in prison, as he answered departmental questions on 18 December 2012.
Labour MP Andy Sawford warned that the introduction of a payment-by-results model could be "damaging" to offender management.
But Mr Grayling, who has experience of introducing a payment-by-results scheme in his former role as employment minister, insisted the voluntary sector could bring "real expertise" to lowering reoffending rates.
Home Affairs Committee chairman Keith Vaz said his cross-party group of MPs recommended offenders should be drug-tested on leaving prison.
Mr Grayling said prison officers had expressed to him their frustration that "treatment begins in prison and then stops at the prison gate".
He said his department was working on ensuring that treatment continues after the prisoner is released.