Karmageddon: The Independent review and the future of SIL.

The independent review has dropped, and we have some important signals about the future of the NDIS. This is unmistakably the biggest shakeup of the NDIS and there will be clear winners and losers. While importantly, people living with a disability should come out ahead (which is rightly the focus of this review), the changes heralded by the report will send shockwaves through the sector, and as The Honourable Bill Shorten alluded to, through the personal finances of many owners within the scheme.

In this article, we will get into the details about the operational and financial impacts expected and the second and third-order effects that will change the scheme's landscape. Perhaps the most interesting of our expectations is a complete reversal of the SIL trend that saw customers defect from the top 10.

Effects on SIL

SIL is notoriously the engine of much of the rampant scheme growth (in addition to early intervention). A major issue in SIL is the confluence of three factors that make SIL plans eminently contestable, namely:

·?????? A perspective at the AAT and amongst advocates that living on your own or in reduced ratios is often reasonable and necessary.

·?????? Largely uncontrollable risks related to inter-resident violence (as demonstrated in the Own motion enquiry).

·?????? A strong incentive from providers to reduce ratios to minimise vacancy risks and increase revenue.

Aggregating these factors has led to a SIL market that has seen over the years a proliferation of 1:1 arrangements that have substantially impacted scheme stability. A blanket 1:3 rule, combined with independent assessments and “foundational supports”, will likely reverse this trend.

Firstly, a de facto 1:3 arrangement will likely lead to circumstances where a 1:3 arrangement must first fail before alternative options can be considered. This is because the material needed to overcome a 1:3 evidentiary hurdle will be difficult to muster outside the SIL setting. On this basis, the cases of 1:1 and 1:2 in the first SIL plan, which have typically been used to exit people from more restrictive settings, will become increasingly less common.

An independent assessment approach, combined with non-market foundational supports, will mean that for the first time, the agency is in direct control or influences most of the supporting evidence generated, support recommendations and indeed the very supply of most assessment mechanisms in the early stages of a participant's scheme journey. The aggregated impact of this major overhaul is that the capacity for individuals to generate evidence to surmount a 1:3 evidentiary hurdle will be substantially more difficult as the balance of power shifts towards the Agency.

Budgeting before planning based on reference ranges will also have a chilling effect on ratios lower than 1:3. Indeed, in our experience in the scheme, the 1:1 funding arrangement is often determined by elements that are not diagnostically or even functionally self-evident. Often, 1:1 arrangement is often determined by forensic and inter-personal behavioural elements that would be far more difficult to capture in reference ranges from assessments. Indeed, one only must briefly contemplate the combinatorial explosion of reference ranges if we had a n dimensional matrix with n determinants. More likely, needs communicated during intensive planning sessions will be less likely to be discovered in an allocation based on a limited assessment outcome. This new approach to planning will also furnish the NDIA with a new line of recourse, which is “make the adjustments within the participants budget, it is flexible funding”, more on that later.

Finally, the “joint commission” approach proposed for scheme navigators will also directly and seriously influence the propagation of SIL and the capacity for non-1:3 arrangements. A joint commission approach is proposed throughout the independent review, which will essentially amount to blocking funded support coordination under the auspices and centralised control of the Agency or another federal body. The independent review is also comprehensive in its recommendations about how such a function should be run: locally, with centralised control, monitoring and ostensibly procedures and KPIs. Naturally, a scheme with centrally controlled and monitored support coordinators will enable the Agency to monitor Home and Living recommendations, and how their own evidence is being interpreted for advocacy and to make recommendations.

Integration

These three new approaches will furnish the Agency with the tools to centrally monitor and control the inflow of SIL customers and their funding intensity to a far greater degree than before the reform. It is likely that substantial, formal, and sustained evidence will be required to change these arrangements and that evidence will be much more closely monitored by the agency or those in their auspices. While there will still be exceptions to this rule where clear evidence is presented, it will likely be far more challenging in the future.

Figure 1: “HE WHO CONTROLS THE PAST Assessments CONTROLS THE FUTURE. HE WHO CONTROLS THE PRESENT Foundational supports CONTROLS THE PAST Assessments.” – George Orwell, or something.

The integrated impact of this change is an impressive feat of policy engineering. The review clearly understood that the exploding cost of SIL is a function of the planning process, and the planning process is a function of advocacy, evidence, and interpretations of reasonable and necessary. Not only has the review proposed a budget process derived from a reference range (which means limited argument on the quantum of funding) they have also imposed control of the very evidentiary processes that were wielded against them in the past. In effect, we have a closed ecosystem where the quantum of the SIL plan is opaque and difficult to contest, and the basis of contesting it is encased in an agency-influenced apparatus. Indeed, this new process reveals that the team at the independent review have a deep understanding of the mechanics of the scheme and the second and third-order effects.

Suck it up

Divorcing the plan budget from the actual hourly needs of the participant will profoundly affect organisational behaviour across the sector. Because plans will no longer be directly tied to hourly funding requirements, the NDIA can argue that it is incumbent on the provider and the navigator to determine how the existing plan can absorb changes in the participant's needs or behaviour. Indeed, it also creates opportunities to argue that the participant's current SIL arrangements were initially “under-scoped” and that the additional elements of the participant's plan, such as community access, must be curtailed to accommodate their “reference-based” level of need.

This is where the independent review's true genius becomes clear: precisely the interrelation of all their recommendations creates a multi-directionally clamp down on SIL funding escalation. Imagine this, if you will: the organisation has determined that the client needs to decrease their ratio from 1:3 to 1:2 due to risks in the household. Before, this was as simple as having a chat to a support coordinator, lodging a change in circumstances, and collating the evidence across the participant's practitioners. Consider the prospective hurdles:

1.?????? Can you clearly demonstrate that alterations to the participant's package can’t be utilised to accommodate the change?

2.?????? Do you have evidence that outweighs a standardised assessment conducted by a trained assessor? (Recall that assessment funding for therapy will be far less prevalent and internalised).

3.?????? Have you been able to convince a “joint commissioned” federally funded “navigator” that the change is necessary?

4.?????? Are you prepared for the participant’s navigator to canvas every existing vacancy in a nationally consolidated register? Is there another provider that thinks they can do it?

Not only will we see the phenomenon of “sucking it up” take hold across the sector, but the practice of taking a participant and then arguing with the agency once they’re in your care (a common practice) will also likely shrink considerably. The reference ranges will be the reference ranges, and unless clear and obvious danger to the participant or their housemates manifests, it will be up to you to adjust their package to suit their needs. This will mean negotiating directly with the participant to reduce the support level they receive outside of SIL. In fact, this is the first time the scheme will incentivise participants to bargain for sub-unit price rates.

Subunit price rates

Budgeting before planning will result in some cases where the participant cannot fully meet their desires by their reference range budget. Indeed, it is impossible for the reference range to accommodate variances in someone’s social and familial interests and hobbies. If someone wants to maintain their “higher than expected social expectations,” then the only way for them to do this will be to spend less on their SIL component (recall that up until now, the participant's needs and requirements were planned on an hourly basis).

Until now, it was as simple as going back to the planner and clearly articulating the need. Now, the participant will have a reason to barter for different rates or utilise providers with optimised price structures. Given the likely reduction in SIL growth, we will see providers desperate for growth, finally competing on price in the participant's plan.

Impact

The impact on the future of SIL will be tremendous, and it would not be surprising if Bill Shorten achieves his 8% cap on scheme growth by finally reigning in rapid SIL growth. To understand the winners and losers in this arrangement, you must look at how SIL funding is distributed and the broader mechanics in the market.

In 2022, when we have good data, the major players in the top 10 received less than 87% of the average SIL package for their cohorts. Given the vast size of their size portfolio, this amounted to a clustering of lower-funded clients, partially driven by state government transfer. This raises a curious question, why were participants from the state government days receiving lower funding levels than the newer SIL participants?

This curious feature also presents itself in the market share of the major providers:

You’ll notice immediately that their growth share was vanishingly small compared to prior years. This data is shown in the NDIS data itself, where we see a 1% drop in market share in the space of a single year:

While working across the larger providers, we’ve heard some interesting accounts of how this occurs. While no doubt the Royal Commission and customer service drive some of this deviation, we have heard the following:

·?????? Larger providers are easier to target for plan reviews.

·?????? Underfunded customers who cannot exit receive a substantial plan adjustment when transitioning providers.

·?????? Some support coordinators have engaged in preferential referral practices that sometimes include incentives.

·?????? Internal SIL referral rates from support coordination in some businesses are exceptionally high.

·?????? Some providers have promised other “kickbacks” in the scheme's grey areas.

·?????? Smaller providers can differentially target high-value 1:1 participants by capturing important lead pipelines.

All these practices (while we don’t have good data on their prevalence) end under the new SIL planning regime. Centrally monitored navigators will be closely scrutinised for “sharp practice,” and the new payment system will prevent the transmutation of NDIS funds into “other” payments. The process of contesting ratios will become increasingly more difficult, causing a broad shift toward the 1:3 setting or higher. As the data demonstrates, the larger providers are the most experienced at managing higher ratios and will have the most infrastructure to capture this new and adjusted cohort of providers.

Perhaps somewhat ironically, the “yielding” of market share and growth share of major providers has inadvertently averted the “eye of Sauron” to other actors in the sector. While it was the case that the majority of SIL volume was concentrated in 20 providers, the explosion of SIL growth into private providers, where more expensive arrangements are clustered, has made the larger not-for-profits into potential collaborators rather than targets for easy savings.

It also goes without saying that larger providers have an undeniable edge in “joint commissioning” arrangements. Their capacity to plan and deal at volume means substantially fewer meetings and communications between consolidated navigator entities and providers. Indeed, major providers have been contracting and dealing with state governments in “tender” arrangements for decades and know precisely how to engage state customers and address their concerns, risks and desire for control and convenience.

Survival

Perhaps the most interesting feature of these proposed changes is the impact of plan revisions. Our data demonstrates that the lower ratio clients are clustered toward the smaller end of the provider spectrum. This means they have far smaller balance sheets to manage a client transitioning from a 1:1 to a 1:3. To be clear, a client who transitions from 1:1 to 1:3 will create a funding blackhole over $300k but will still require the same level of employed support as in a 1:1 arrangement. We also know that the government has employed SIL rationing mechanisms in the past. In fact, in 2021, we thought that the SIL market would flatline (a change in government resulted in an explosion of SIL, but the underlying need in the population didn’t change, which suggests a greater degree of SIL ratioing than expected).

In the new environment where SIL referrals are greatly slowed, this would be disastrous for smaller providers with a substantial cohort of 1:2 or 1:1 arrangements. Consider the example below:

A provider of this size and shape is likely known to many of our readers, and someone who was an operations manager only five years ago is now making a substantial margin by offering a specialised and highly personalised service.

It is likely this provider knows each client, their parents, and support coordinators well. They likely knew of many of their clients before they received SIL in their plan. In fact, many of these clients are living safely and comfortably for the first time in their lives. They may have worked directly with support coordinators and parents to advocate for the “right” funding package.

Let us contemplate a scenario where 1:1 arrangements are reduced by 30% and 1:2 arrangements are reduced by 50%. If the provider cannot fill these vacancies created in their cohort (and it is unlikely that they will, given the impact reform will have on growth), the provider, in this case, can expect to make a loss of $360,000. In our case, we have chosen an efficient provider now making a -5% margin. Many providers are already skirting the boundaries of profitability, and many other balance sheets will not be able to tolerate a rapid client ratio shift, especially one they will not be able to grow out of, or address vacancy risks. The best-case scenario for these providers is that their customers in vacant houses quickly transition to larger providers with 1:3 infrastructure. They have the balance sheets to tolerate this grand transformation and aren’t exposed to the concentration of major 1:1 to 1:3 plan changes in their cohorts. It is also worth noting that a turnaround in the fortune of major providers is beginning to manifest, as some of the largest not-for-profits report modest profits for the first time since COVID payments.

Outcome measures

Perhaps one of the most interesting features of the NDIS is that it is anti-outcome. Participants stay on the scheme longer, and their plans escalate in value far more than the productivity commission originally anticipated. One only needs to look at employment data to understand that the NDIS reduces employment outcomes. Recent actuarily analysis suggests that at least a part of this is determined by the perverse incentives created by the scheme, and the fact that there are no other supports available in the community.

Perhaps another perspective is that very few of the interventions offered by the sector have a strong evidence base or tangible effect size on key outcomes. This evidence base is constrained by a serious counterfactual problem, given that every individual is different in the holistic study of human life. Given the dearth of quality evidence, outcome-based payments would be heavily determined by cohort selection. That is, an outcome-based payment system would cause providers to perversely pre-select customers who are already on outcome trajectories. Unless the agency can adopt a robust and deeply statistical “value added” metric, it seems unlikely that outcome payments will venture into the SIL space. However, we note language in the report that seems to suggest that a core outcome of SIL would be moving to a less restrictive living arrangement. We would expect that the incentives would have to be strong indeed for providers to pursue this (given the current incentive set), and outcome-based punishments would clearly result in SIL participants being unable to secure places to live.

Rent seeking on the right terms.

It is interesting to reflect on some of the rhetoric surrounding the review to further “flavour” our predictions that will follow. Our benchmarking data indicates (somewhat unsurprisingly) that for-profit providers are more profitable, despite payroll tax, FBT and corporate tax burdens. Our benchmarking data also shows that for-profit providers tend to have far lower overheads.

It is tempting to conclude that for profits have deliberately suppressed their overheads and service levels to maximise profits. However, in a market with an active regulator, and vibrant opportunities for participant exchange, the more likely alternative is that not-for-profits tend to have inefficient overhead structures (the incentives are all aligned for this to occur).

What we have in this case is an ideological battle between individual profits and individual sinecures. While contracts control profits, politics control sinecures and don’t possess as much volatility. From an economist's perspective, the sinecure approach is more likely to positively influence a Gini coefficient, which may be the correct political alignment. ?While we can expect the review to generate substantial savings, a more profound shift will be where the “surplus” value of the scheme is accrued.

Another view on margin.

Another potential effect on market dynamics in SIL is the change in the regulatory space. Much of the not-for-profit overhead apparatus is driven by what is often disproportionate or targeted regulation. The own motion inquiry is a fantastic example of government, largely for convenience sampling, investigated the largest not-for-profits to exclusion. This focus of government, which was likely correct, has essentially forced not-for-profits to have substantially more quality infrastructure than their for-profit competitors.

A change to proportionate regulation will likely see the cost impact of quality and compliance be more evenly distributed across the sector, with smaller providers increasing their expenses and larger not for profits potentially being able to scale their quality teams across more participants. Also interesting are the potential changes to the participant intake process and matching process. In the event of equalised regulation, the capacity for providers to rapidly onboard participants, with minimal evidence of participant matching, risk analysis and social foresight, may be hampered. This will mean that part of the frustration of dealing with larger providers in the intake process will be evenly distributed across the sector.

Wrapping up the future of SIL.

The major changes proposed to the SIL market and the scheme strongly favour large not-for-profits and may bring about the untimely demise, or at least the radical reduction of smaller for-profit providers. Indeed, if anything, margins will be disappearing, and the growth rates investors expect will vanish from the landscape. In this case, the big winners will be the top 20 not-for-profits who can manage their pipelines well enough to handle this inter-organisation transfer at speed and scale. While they typically haven’t been able to do this well, the end of 1:1 and 1:2 at volume and a complete revision to support coordination process will see their star rise.

Whether or not this is in the best interest of SIL clients remains to be seen. Fundamentally, this will put the brakes on SIL growth and maybe even reduce absolute SIL expenditure. To accurately gauge the ethics of this change, one just needs to ask, “Do I believe there are people in SIL who don’t need to be or currently receive too much funding” and “Do I believe that people in the future will receive SIL or a lower ratio when they shouldn’t have”. If the answer to this question is yes, then we have ethical reform. We’ll let you be the arbiter of that.

Undoubtedly, this review will remove much of the profiteering from the scheme, and instead, resources will be increasingly directed to people with a disability. That is an unassailably good thing. But because of how problematic the assessment process is and the number of perverse incentives at play, redirecting resources means that some people with a disability fall through the cracks. While it is the obvious edict of the government to govern for maximal utility, the scheme we knew where a certain amount of waste was permitted to ensure that nobody missed out is likely behind us.

A note on the review

It is striking that the independent review has managed to address every lever that resulted in the explosion of SIL growth. Perhaps more striking is that the review and the minister have made such a seismic change palatable to the public and, indeed, most of the sector. Without being too cynical, a key apparatus in this change is an independent assessment that was universally decried merely 3 years ago when proposed by the former government. One must acknowledge the minister's achievement who has undertaken a deeply technical review of the amorphous, complex, and mercurial beast of the NDIS, accurately gauged and responded to the core mechanisms at play, and then successfully sold it to the public. One must further acknowledge that significant special interests would have been at play, especially in the plan management space, where tremendous investments have been made and substantial fortunes eroded on the stock market. Some of these interests even have deep labor ties. To resist this, push ahead, technically and with remarkable foresight, is an achievement that may be one of the most competent pieces of political and bureaucratic alignment seen in the public sphere since the implementation of GST.

So, what now?

Buckle up, the ride ahead will be rocky. The first order of business if you are a smaller provider is to take stock of your 1:1 and 1:2 arrangements. Seriously contemplate how likely they are to survive genuine scrutiny from Federally controlled navigators and functional benchmarks. If you have doubts, contingencies must be made to minimise your exposure to vacancy risks.

Secondly, if your business has enjoyed rapid growth from favourable support coordinator relationships, you must contemplate how you will bargain with a consolidated “joint-commissioned” navigator complex armed with a national vacancy register. You will need compelling and irrefutable evidence that your product is differentially in the best interest of an individual, who is likely in a ratio they don’t want to be in.

If your business is making a small margin or loss and expecting to grow out of it, you urgently need to evaluate your operating metrics and overhead density. Contemplate how your business should function if this were the zenith of its revenue.

If you’re a large national not-for-profit, optimising your process for monitoring and managing 1:3 arrangements would be prudent. Naturally, I don’t need to tell you how to deal with a central planning and distribution apparatus.

A brief note on SDA

If there is a substantial change in the distribution of participant ratios in SIL, and a regression towards the mean of 1:3, demand will likely evaporate at the other ends of the distribution. There are currently over 5000 dwellings outside of the 1:3 arrangement. While the 1:4+ designs can likely accommodate a 1:3 ratio, it will fundamentally change the return profile. The proliferation of SDA apartments (where they intersect with SIL) will be another matter entirely. In fact, the +1:3 arrangements are where the independent review and Royal Commission agree on something, so changes to demand in this sphere should be well anticipated.

Concluding

The direction of this reform is not surprising. Shorten has been signalling this change since Labor came to power. What is surprising is the perspicacity and the likely effectiveness of the implementation. The National Cabinet already has a broad agreement on how foundational support will work, which will wreak havoc across established employment-based Therapy providers. It seems likely that a similar agreement and implementation will occur in the SIL space. While we have a 5-year total implementation horizon, it would be prudent to expect changes in new SIL entrants in the next financial year. Five years from now, when we’re having a quiet beer post-conference, we will say in whispered tones “Remember the days before the independent review?”

A summary of predictions and a challenge

A theory (and consultant) is only as good as its predictions. Here is a summary of predictions to use against me in 5 years:

90% certainty or greater

·?????? There will be substantially reduced per capita rates of people entering SIL.

·?????? The growth rate of SIL funding (when controlled for inflation) will reduce.

70%

·?????? Providers will be asked to accommodate changes of circumstances within the participants’ existing funding.

·?????? It will be increasingly more difficult to successfully lodge a change of circumstance or equivalent.

·?????? Many 1:1 and 1:2 participants will see their ratios changed.

·?????? 1:1 and 1:2 participants will be substantially reduced in the NDIS.

60%

·?????? Price competition will emerge in the SIL market.

·?????? A large national not-for-profit will have revenues exceeding $1 billion dollars.

·?????? Referral patterns will change significantly as prior referral arrangements are abolished.

·?????? There will be a national, consolidated SIL vacancy register.

·?????? The average margin for-profit providers will be reduced significantly.

·?????? The growth rate of smaller and for-profit providers will decrease relative to large not-for-profits.

50%

·?????? Major providers will see a marked increase in their growth share based on the change from support coordination to “navigators.”

·?????? Smaller providers with significant volumes of 1:1 and 1:2 participants will face solvency issues.

·?????? There will be an increase in per capita inter-personal violence in SIL settings.

20%

·?????? Substantial outcome-based payment measures will be introduced.

10%

·?????? SIL participants will exit into “less restrictive” placements at volume.

While off on this tangent, we need our thought leaders to make substantive predictions about how the sector's future will unfold. Several are doing this already; Brendon Grail comes to mind. Ideally, we as a sector can move away from content like “The NDIS review has dropped, and it is a review of the NDIS. The NDIS involves people with a Disability”. That’s why I encourage you to leave your predictions in the comments section. In 5 years, I will appoint the winner based on the volume of correct predictions and the relative uncertainty of their correct predictions (more points for more volatile correct predictions. You will be anointed with the title of “Empathia’s wisest reader”, and we will issue you a certificate (laminated on premium paper!). There is collective wisdom in the sum of our foresight, and it is in all our interests to understand where this is heading.