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The NDIS fee-for-service model certainly allows for greater efficiency and flexibility than traditional block funding.
But the model is still extremely tight, and organisations offering NDIS services can face challenges in breaking even due to severe cost pressures.
In this article, we cover the latest price changes, and outline some of the challenges NDIS businesses can face in fund and budget management.
Price updates
The latest increase of the underlying disability support worker (DSW) cost model is 9%. The increase is based on known cost pressures for providers, and allows for corporate overheads of 12% of direct costs. It incorporates changes to Award and Fair Work wage decisions, costs associated with managing the pandemic, costs of quality and safeguards regulatory requirements and changes to the Superannuation Guarantee Charge (SGC).
Also built into the funding is an assumption of a utilisation rate of 92% per billable hour of DSW.
The percentage increase consists of:
- 1.7% increase to base prices.
- 2% temporary loading.
- 4.6% for minimum Award wage increases.
- 0.5% increase to the SGC.
In effect, statutory wage increases and the SGC increase have been passed on in full. An additional $1 per hour “operational overhead” has been provided to cover the mix of the various levels of staff costs (e.g. supervision costs and permanent/casual split). These costs have now been grouped into one category.
Challenges for organisations
The increase might sound quite significant. But on closer look, it is unlikely to make radical changes to the underlying cost pressures on businesses. Nor will it have a significant impact on small to medium businesses struggling to break even – especially following three years of contractions due to the pandemic.
For example, when you account for the statutory inflationary costs such as wages and superannuation increases, there is a comparative increase of $2.37 per hour. This is driven by the temporary loading of 2% and the $1 increase in operational overhead.
Cost challenges for NDIS businesses include:
- High overheads – our modelling reflects NDIS benchmarking of around 30% overheads for most organisations. We consider it difficult for businesses to meet the 12% target for overheads. Overheads as a proportion of direct labour costs have also increased compared to previous years. For example, they peaked in 2019-20 at approximately 52% and dropped to 44% in 2020-21 largely due to COVID-19 contractions. This indicates that during the pandemic, many businesses have carried overheads which served to increase financial pressures.
- Base wages - these tend to be very high, as staff members are often employed at higher levels and wage points.
- Utilisation – achieving a 92% chargeable rate is ambitious at best. Our modelling indicates utilisation of 35% to 75%.
Wider observations
There are wider pressures that also affect the industry.
- Market challenges
The NDIS market is maturing and flattening, following the double-digit growth of previous years. Also, some regional areas in particular have very thin markets, where there may not be enough business for provider organisations to meet break-even point.
- COVID-19 impacts
The pandemic resulted in a short-term contraction in funded service hours which led to reduced revenue. At the same time however, businesses continued to carry overheads.
- No increases for support coordination and therapists
These services are usually relatively profitable in the scheme of things. However, they are also currently experiencing significant workforce shortages and high demand. Freezing of prices for these services will result in squeezing of overheads due to the costs of retaining staff.
- NFPs still operating on block funding business models
Some legacy not-for-profit business models are still relying on block funding as they have not transitioned to the fee-for-service model. This comes with its own set of challenges, including increased losses over time. Cash assets (i.e. block funding) may have funded ongoing losses, but they have not improved efficiency.
- Low focus on efficiency
Care organisations can tend to be heavily focused on services and place low emphasis on the ‘business side’ of things – which can in turn lead to inefficiencies.
Inefficiencies will be visible in overhead percentage. Businesses operating at 25% and above of overhead compared to direct costs (wages + oncosts) will struggle to make a surplus across most services.
Some smaller NFPs are using spreadsheets to produce timesheets and to do administration tasks, which can be time consuming and cumbersome, requiring higher levels of staffing to complete. Overhead cost reductions and greater efficiencies could be achieved in many cases by making use of advanced software platforms. Examples include automated client and customer management systems, rostering programs, and management dashboards that provide real time data on service metrics and plan acquittals.
- Workforce shortages
These are reported widely across the sector, driven by shortage of work hours (largely due to COVID-19 issues), lack of available staff (especially in regional areas), and high competition from aged care and other community services.
Without adequate employees however, your business won’t be able to grow. This makes it crucial to have strategies in place to attract and retain staff, which may involve paying higher wages.
How RSM can assist?
At RSM, we understand the difficulties NDIS businesses can face in making ends meet. Our services in the NDIS space include advice and assistance regarding risk management, business growth, financial management, project development, staff training and development and more.
For further information
To learn more about the updates to pricing and challenges, please contact your local RSM office.