National Disability Services releases a State of the Disability Sector Report each year, and it is quite a read.

One interesting and potentially concerning finding in the report is that for-profit providers are far less likely to worry about providing NDIS services at the current pricing. This finding is curious and worth looking at. Indeed, the following worrying remarks selected by the NDS intimate that there is malcontent toward these providers:

“‘it is too easy for ‘for profit’ operators to do very well by cherry picking what is most profitable at the expense of more whole of life commitments from ‘not-for-profits.’

And

‘these are shameful results of the underfunding of the system to registered not-for-profit orgs’.

This finding seemed implausible at Empathia Group, and our “cherry picking” alarm went off. Much of the NDIS corresponds to the NDIS Disability Support Worker cost model. The cost model includes a 2% margin for providers if services are run at the 25th percentile of efficiency. If for profit providers are expecting to pocket that 2%, how are they more confident than not for profits when their expectation of margin is far lower?

Correlation is not causation

We hear it over and over again. In the same table, the NDS shows that funding dissatisfaction is associated with organisation size. However, what we don’t see is the distribution of size by profit status.

This is an important point. Empathia Group contends that for profit satisfaction is simply a product of most for profits operating at a much smaller scale. Consider that 34% of very small providers are worried, and 69% of larger providers are worried in their sample. Firstly, Empathia Group’s experience is that the larger legacy of not-for-profits converted state government transfers and their pre-NDIS customers. So, naturally, they represent a far larger portion of the NDIS larger providers. Secondly, if a for-profit provider were extremely concerned about their NDIS offering, they simply would cease services – this represents survivorship bias that is likely affecting the sample.

Markets

Empathia Group is also confident that the product type provided significantly influences satisfaction with the price. As you would expect, Allied Health providers, especially sole traders, will likely represent a much greater portion of the very small sample. Their pricing is far more viable and based on market conditions rather than the actual cost of service. These providers are far more likely to be for profits in our experience. We believe that pricing satisfaction is likely to be driven by allied health sole traders who enjoy a completely different NDIS economy.

If we controlled for the provider type and provider size, and it still turned out that not for profits were 50% more likely to be dissatisfied, we’ll happily issue a retraction.

We conclude that the for profit price association is likely an artefact of the sample. It is easy to malign for-profit providers with univariate reporting. Indeed, we can think of more than one for profit that charges below the price cap and offers employees higher wages than is standard in the sector.

As for profits get larger, they will likely be subject to the pricing concerns. This begs a crucial question – why is size correlated with concern about pricing?

The cost model

A straightforward conclusion is that the larger your organisation is, the more likely it has accrued a decent volume of SIL customers. However, while SIL attracts significant revenue because of the contact hours required, it also includes a number of potential minefields.

As your organisation gets larger, the probability of a plan change or a vacancy increases. This is especially true if your growth rate is lower than your expected growth. What arises in these situations is unfilled vacancies. As the sector knows, unfilled vacancies cannot be recouped and wreak havoc on the profitability of a business.

If your organisation is charging 1:3 and is only receiving income from 2 customers, your 2% margin will be annihilated in a matter of weeks. If you accrue several vacancies over your program, it is simply impossible to break even. In any other market, like hotels, the room’s price reflects the probability of a vacancy. This is how all other markets account for occupancy variation. But since the cost model is precisely the cost of service provision, every larger organisation is gambling on the stability of its customers’ funding packages. If you want to understand how your organisation is positioned then why not check out our provider SIL assessment.

The takeaway

Not for profits, you shouldn’t be concerned that for profits have discovered a secret, nefarious formula that allows them to extract hidden value. They’re running on the exact cost model you are, except sometimes their investors expect to see the 2% that you accrue.

Instead, now is the time for solidarity. While vacancies exist, the cost plus funding model is categorically broken and puts significant downward pressure on innovation in the SIL space.

What can you do about it?

In our experience, smaller providers in the SIL and community access space have some advantages. They’re able to take their supervisory 5% and 10.5% overhead much further, given their systems are incredibly lean, and one person is often doing many things. While you can’t replicate this approach, you can do a real deep dive on your structures and overhead and accrue some of that surplus in your margins. It isn’t perfect, but the providers who do this and pass on this additional value to their customers will have a real edge that can scale. If you want to assess how your organisation is positioned to take advantage of this, then check out our free SIL Viability Assessment.