13th Annual Disability Summit 2022: An overview of NDIS Cost and Sustainability Issues

In recent years, there has been a lot of heated debate regarding the sustainability of the National Disability Insurance Scheme (NDIS), which has included talk of inefficiencies, cost blow outs, secret “razor gangs”, and mass fraud; as well as analysis about the root causes. Unless you are deeply familiar with NDIS operations or have been following the debate closely, the bureaucratic jargon can be confusing. ?

The very phrase ‘Scheme sustainability’ has become quite loaded, often used as a catch?all phrase that encompasses several interrelated issues. The controversy is unfortunate because at its core, ‘Scheme sustainability’, is about ensuring that the Scheme will always be there to support people living with disability – and that’s something most Australians can agree on.

To ensure that the Scheme will always be available for the people who need it, we need to bring all Australians into the discussion, which should include both current and potential participants, experts, policy makers, and the taxpayers who fund the Scheme. It may be an awkward conversation, but we must be willing to have a robust discussion about Scheme sustainability and the future of the NDIS in a calm and respectful manner. ??

This background paper, which is based on comments I made at the National Disability Summit in August?2022, unpacks the term ‘Scheme sustainability’ by providing an overview of the facts, history, and key areas of debate.

Firstly, when people talk about ‘Scheme sustainability’, they may be referring to several issues, or a combination, which can include the following:

• the original estimated costs of the NDIS
• the actual current costs of the NDIS
• the projected future costs of the NDIS
• the reasons for the discrepancy between the original estimates and current/future costs
• how the NDIS compares to other big social programs in Australia
• whether spending on the NDIS is delivering ‘value for money’ and a ‘positive social return’?
• who pays for the cost of the NDIS, are they happy to pay it, and is it affordable??
• what the recent change in government means for Scheme sustainability?

NDIS Costs: Original Estimates, Today And Tomorrow

One of the reasons why NDIS costs have drawn a lot of attention is that the projected future cost is over 400% more than the original estimate, which is indeed a major variation.

In its seminal 2011 report, the Australian Productivity Commission (PC) estimated that the gross cost of NDIS participant supports would be about $13 billion in 2018-19, once the Scheme was fully operational and had onboarded the 410,000 participants that would qualify for individually funded supports. However, a subsequent PC report in 2017, which drew on newly available data from the NDIS trial period, revised the gross cost estimate to $22?billion in 2019-20 to support about 475,000 participants.

Fast forward to today, the actual cost of the NDIS for 2021-22 as reported in the Commonwealth Budget for 2022-23 came in at $29.3 billion, about 30% higher than the revised 2017 PC estimate. The budget allocated for next year (2022-23) is $33.9?billion, rising to $44.6?billion by 2025-26, about double the revised PC estimate. It’s worth noting that the current $29 billion price tag already makes the Scheme one of the single largest spending programs in Australia. It’s now right up there with Medicare – which also cost about $29?billion in 2021-22 – and ahead of aged care, which cost about $24?billion.

Moreover, the latest projections by the government?appointed Scheme Actuary (regularly audited by the Government Actuary that sits in the Department of the Treasury) forecast that participant costs could double again within a decade to reach $59.3?billion annually by 2029-30, with a low and high range from $53.2 billion to $74.2 billion. Even the central estimate of $59 billion would be about quadruple the original 2011 PC estimate and almost triple the revised 2017 PC estimate.????

After widespread scepticism in early 2021 about these actuarial projections from multiple stakeholders, Disability Ministers (from the states and territories, as well as the Commonwealth) commissioned an additional independent audit of these projections by actuarial firm Taylor Fry. The results of that audit, released in December 2021, broadly validated the Scheme Actuary projections and, in fact, found that “baseline estimates may represent a moderate underestimate of the expected value of future costs”.

Hopefully that settles the controversy and we can all accept that the numbers are what they are, which then leads into the more interesting and important questions about what’s driving these numbers and what does it all mean? When the cost of any government program blows out by such a large margin, people are naturally going to ask questions. As an Economist and a taxpayer, I think that’s legitimate. It doesn’t necessary mean that the higher spending is bad. But it deserves a proper and full explanation.

The Difference between Original Estimates, Current Costs and Future Costs

At a mechanical level, the higher NDIS participant costs are driven by:

1. higher-than-expected participant numbers
2. higher-than-expected spending per participant

At this point in the life of the Scheme, participant numbers were anticipated to have reached their peak and basically flatlined. However, this has not been the case and there is little sign that we are approaching any kind of plateau in participant growth. About 75,000 participants entered the Scheme in the last financial year (2021-22), a 19% annual growth rate. While this growth is down from 37% the year before and 66% the year before that, we are still a long way away from participant numbers stabilising. Hence the latest projections from the Scheme actuary that participant numbers could reach 860,000 by 2030 – 385,000 more than the 2017 PC estimate.

The fastest growing cohorts of participants are young children aged 0-14 with autism and development delay as well as adults with psychosocial disability. Some of these participants were originally expected to enter the Scheme on a temporary basis (under Section 25 of the NDIS Act 2013). Under ‘early intervention’ and ‘recovery’ pathways, some participants were anticipated to successfully develop skills and strategies to increase functional capacity and independence, and then exit the Scheme. This has also not happened, with the recorded non-mortality exit rate coming in at 0.8%, which is almost half the original estimate of 1.4%. Moreover, rather than celebrating that some participants no longer need the Scheme, the term ‘exit’ has become controversial and synonymous with the NDIA trying to ‘kick out’ vulnerable participants. The net result is that more people are staying in the Scheme for longer than expected, which subsequently entails higher than anticipated costs.

On the spending side, and notwithstanding much controversy and news reporting about plan budgets being cut, the actual average spending per participant continues to grow and reached around $55,000 in the last year (NOTE: it’s possible for actual spending to rise even as plan levels fall because average utilisation of plans – the share of the plan budget that is actually spent – has been rising over time at a faster rate than plan budgets have been falling). The average annual growth rate in actual spending over the past four years has been 11.8% per year. Of course, there are wide variations around these averages, with average payments to SIL participants (around $325,000) significantly higher than non?SIL (under $40,000), and payments to older non-SIL participants aged 65+ significantly higher (around $65,000) than younger non-SIL participants 0-14 years (under $20,000).

In turn, the cost per participant is driven by both growth in the quantity of supports consumed and the price per support, neither of which has strong – let alone agreed – cost control mechanisms. Participants are consuming more units of support and a wider variety of supports. Furthermore, determining which supports and what level of support may be ‘reasonable and necessary’ is fraught with difficulty, which is at the heart of the increasingly pitched battles that have taken place over recent years between participants and the NDIA – many of which are now under mediation in the Administrative Appeals Tribunal (AAT). In short, no one has yet come up with an accepted approach for determining an agreeable and workable definition of ‘reasonable and necessary’. Attempts by the Agency to standardise the level of supports in the name of fairness and equity have largely been rejected by the sector – sometimes on principle (many are of the view that any standardisation goes against the principle of individualised funding); and sometimes due to insufficient consultation and co-design (Independent Assessments being the most prominent example).???

In terms of prices, the Scheme has long been plagued by complaints, particularly from providers, that the price limits set by the NDIS are too low and insufficient to cover costs. The NDIA response has been to conduct periodic specialised ‘price reviews’ as well as a routine Annual Price Review (APR) to ensure that prices remain fair and reasonable. All these reviews are sensitive and subject to sector and political pressure. The most recent APR announced that prices for services delivered by disability support workers would rise by 9% from 1 July 2022, well above even the currently elevated rates of national inflation.

Beyond the mechanics, the underlying root causes of the higher-than-expected costs are complex – which I have written about previously. The most cited factors are that:

1. the original estimates (based on limited data) underestimated the needs in the community
2. the creation of the NDIS empowered more people to seek and obtain diagnosis for disability
3. other universal and/or shared community and mainstream disability supports (such as aged care, social housing, education, mental health etc) have been underfunded, which increased the dependence on the NDIS and led to “scope creep”
4. there is limited funding for people with mild disability who do not qualify for the NDIS, which increases the incentive for people to want to be in the Scheme – this is the “oasis in the desert” problem that has been most prominently articulated by inaugural NDIS Chairman Bruce Bonyhady
5. the more generous and uncapped support offered by the NDIS relative to other Australian social programs also creates a preference for NDIS support over other types of mainstream and community supports, even when they do exist

None of these underlying root causes have an easy fix and part of reducing the cost pressures on the Scheme might actually require increased spending on broader mainstream social systems, which can support other vulnerable Australians, including people living with mild disabilities that may not qualify for the Scheme.?

How the NDIS Compares to Other Social programs in Australia

As noted earlier, the rapid growth in costs now makes the NDIS one of the largest single social programs in Australia. The NDIS is literally the elephant in the room – and it’s going to be hard for people not to stare and ask questions. Moreover, the NDIS is big in absolute terms as well as generous in per capita terms – it provides the highest benefit levels per person of any program. Most social programs in Australia set a relatively transparent and fixed dollar benefit amount based on strict criteria, which also makes it easier to estimate their future costs. There is no scope to negotiate with Centrelink or Medicare for a higher benefit, regardless of extenuating circumstances.

Centrelink?unemployment benefits are fixed at roughly $17,000 per year ($46 per day). The?maximum government subsidy?for Aged Care is roughly $52,000 per year. The Medicare?Mental Health Care Plan?provides a rebate of $87 per session for up to 20 psychology sessions per year. However, the going rate for a psychologist is north of $200 per hour, which potentially equates to an out-of-pocket expense of over $2,000 per year. For many vulnerable Australians this is simply unaffordable and can result in forgoing treatment with devasting consequences.

In comparison, the NDIS does not have a fixed dollar limit. Every participant plan is unique and the funding amount is determined according to individual support needs and the relatively subjective?‘reasonable and necessary’?criteria. In the last year the average NDIS participant received $70,000 per year and those who require extensive round-the-clock support to live at home, which has parallels to aged care, received almost $350,000 per year. The process essentially involves a lengthy, and often stressful, multi-step negotiation between the participant and the NDIA, which also requires periodic review. Every NDIA decision can also be?internally reviewed and subsequently appealed, increasingly resulting in legal fees that can be higher than the amount of funding being disputed.

Do Australians think that this more participant-centric approach is an appropriate way to determine funded supports? Arguably the benefits could include better citizen satisfaction and outcomes compared to the fixed?dollar approach. If such a system is superior, should it be rolled out to unemployment benefits, mental health supports and aged care; and can we afford to do so? If not, is it fair for one social program to have a generous and needs-based benefit level while other programs provide the bare minimum? Are some vulnerable groups more deserving of compassion for their extenuating circumstances than others?

Is NDIS Expenditure Delivering ‘Value for Money’ and Positive Social Returns?

At a basic level, the terms ‘value for money’ and ‘return on investment’ refer to whether or not we are getting good outcomes at the individual participant level as well as at the economy-wide level for the money we are spending on the Scheme. An efficient Scheme should be seeking to deliver maximum ‘bang for buck’ for every dollar spent – in terms of improving participant independence, functional capacity, and social and economic participation – for both participants and their carers.

However, the reality is, we don’t really know whether the Scheme is currently delivering good value for money or not. This is partly because it’s too soon to tell and partly because there has been very little research done on this question using real-world data. In its original 2011 report, the PC predicted that the Scheme would eventually pay for itself – but that was when the cost was estimated to be $13 billion. Is that still true when the cost is closer to $30 billion or if it rises to $60 billion? It would be great to see the PC do more work on this with real life data now that the Scheme is well and truly up and running.

A recent report commissioned by National Disability Services and produced by Per Capita, which has been widely cited in the sector, says that for every $1 spent on the NDIS, $2.25 dollars is generated in the wider economy. However, this figure was derived from a literature review of typical multipliers in the health space around the world, i.e., it also did not use real data from Australia on the actual performance of the Scheme. Also, is $2.25 good enough or can we do better? And how does $2.25 compare to spending on Medicare, aged care, or mental health? If we made some tweaks to how the NDIS is delivered, could we instead be getting a $3 or $4 return for every $1 spent???????

At the more individual level, Section 34 of the NDIS Act 2013 requires that each and every NDIS funded support “represent value for money in that the costs of the support are reasonable, relative to both the benefits achieved and the cost of alternative support” and that they be “effective and beneficial for the?participant, having regard to current good practice”.

8 years into the Scheme, there is still very little agreement about what these terms mean – and there is certainly no strong evidence base that has been widely accepted. For example, the NDIA commissioned a major report on the evidence base for appropriate levels of support for children with Autism. That report, which was released amidst the furore of Independent Assessment and Scheme sustainability, was largely rejected by the sector. ?It is safe to say that there was simply no trust left to even have these conversations. Nonetheless, this is exactly the type of research that needs to be conducted but undertaken in a way that engenders trust and avoids politicisation. One way to do this could be for such research to be conducted at arm’s length from the NDIA.

In summary, much more research and analysis are needed in this space moving forward, otherwise we’re all at risk of simply guessing.

Who Pays for the Cost of the NDIS and is it Affordable?

This question is at the crux of whether the Scheme is ultimately ‘sustainable’ over the long term – in both a political and financial sense.?The Commonwealth government officially sets the funding level for the NDIS (for both the coming and future years) in its annual Budget documents, which are typically revised halfway through the year. However, behind the scenes, there are complex intergovernmental agreements that split responsibility for funding the NDIS roughly 50-50 between the Commonwealth and State and Territory governments.

All governments of course raise their revenues primary from taxes, so it is ultimately taxpayers (working Australians) who pay for the NDIS. In 2021-22, the total gross cost of the NDIS equated to roughly $2,500 per Australian taxpayer per year. In other words, if the cost rose from $30 to $60?billion, that amount would roughly double to $5,000 per taxpayer per year. Another way to think about it is that it takes five average Australian taxpayers to fund one average NDIS plan (the average Australian pays around $11,000 in tax per year vs. $55,000 for an average NDIS plan).

So, are these costs politically sustainable and are taxpayers happy to pay it? It would be great if we could ask them this question directly. But unfortunately, that’s not how our political system works. We vote for parties based on their general election platforms, not for specific policy questions.

The previous Coalition government, which presided over the implementation of the Scheme from late 2013 to early 2022, repeatedly stated that “with the Coalition Government, (the Scheme) will always be fully funded”. However, for a period in 2021, a gap opened between the money set aside for the NDIS in the Commonwealth Budget and the projected costs of the NDIS according to the Scheme Actuary. The Budget released in May 2021 set aside $26.5 billion for participant costs in 2021-22. However, the Scheme Actuary AFSR Interim update released just a month later in June?2021 forecast costs of $28.1 billion for the same year, implying there might be a $1.6?billion funding gap. While an official funding gap was never confirmed by the government, increasing talk about Scheme costs becoming unsustainable naturally raised concerns about whether the government was in fact committed to fully funding the Scheme or whether it was trying to rein in costs. The question was ultimately settled in the update to the FY21-22 Budget released in December 2021, which significantly increased the funding allocated the NDIS, and in fact fully aligned it with the projected costs of the Scheme that had been released by the Scheme Actuary in June 2021. This development was welcomed by the then labour opposition as well as by state and territory governments.

Heading into the recent 2022 Federal election, no major party officially raised any concerns about the cost of the Scheme. The Coalition continued to pledge that the Scheme “would always be fully funded” and Labor pledged “to stop the cuts”. Most parties, including Labor, also ruled out any tax increases to help fund government spending in general or to help reduce budget deficits. Thus, for now, it seems that there is an implicit political consensus to fully fund the Scheme at its current price tag and trajectory despite record high budget deficit and debt levels.

What does the recent change of government mean for Scheme sustainability?

Beyond ‘stopping the cuts’ the new Labor government has said very little about Scheme sustainability. However, Labour has talked about “fixing the Scheme” and within that broad umbrella, there are lots of opportunities to help improve value for money and return on investment. In its pre-election policy statement on the NDIS, Labor pledged to:??

• Publish more data?so the scheme can be properly monitored, evaluated, and interrogated. We will identify gaps in the current evidence base and gather more information, data and research.
• Fix the planning pathway and appeals?to make NDIS decision-making more efficient, fair, and investment focused.
• Bring forward a planned review of the scheme that will consider all available evidence and look at benefits as well as problems inside and outside the NDIS.?

Nonetheless, there are also risks for the new government. Scheme costs were already projected to rise to around $60 billion by 2030 under the previous Coalition government that was accused of trying to ‘cut costs’. So, does ‘stopping the cuts’ mean that costs could rise even higher under the new Labor government? Can the new government successfully build a case for this with Australian taxpayers?

Furthermore, how will this square with the task confronting the new treasurer, Jim Charmers, who is under pressure to help the Reserve Bank combat surging inflation by tightening fiscal policy and to lay out a credible path to balance the budget books eventually. The Treasurer recently named the NDIS as one of five big spending areas, along with Health, Aged Care, Defence, and servicing the large public debt, which were creating "substantial structural concerns". He has also called for a “proper national conversation” about the services that people want and how we fund them.

Will that conversation canvass major spending cuts? If not to the NDIS, then where else should spending cuts be considered: Health, Aged Care, Education or Defence? There are no good candidates for spending cuts. Should every area do its part and contribute, or should some programs be shielded? And if not spending cuts, are we going to have a conversation about raising tax levels? Should we increase the special levy on the NDIS? Or should we increase the GST from 10 to 15%? Or should the new government cancel the planned income tax cuts that are coming up in about a year’s time?

There are no easy answers, but it’s fair to say that the topic of NDIS sustainability has not gone away. We might get some clues about the long-term plan of the government when the new Labor government hands down its first budget in October 2022.??????