Worrying 2023 SIL Trends

Across the NDIS, you’ll hear two diametrically opposed views on the profitability of SIL. You’ll either hear that the cost model is unsustainable or that providers are generating substantial margins that raise concerns about the quality of services. You rarely hear “pricing is just right”. Indeed, recently the NDS reported that 83% of providers have serious concerns about their sustainability in the wake of a pricing review. This is often accompanied by messaging that suggests “clients will miss out on service” if pricing isn’t addressed, leading to market failure. This article identifies trends that indicate that the SIL market can and will likely become substantially tighter despite provider objections.

What happened to the top 10 last year?

There was unusual activity in the top 9 providers (again, excluding one organisation) in the last year, which breaks important established trends in the NDIS and suggests a major reversal in consumer advocacy and brand value.

Of course, no one expected an additional 5000+ SIL clients in the year prior to the March reporting period – it is simply staggering. This explosive growth, however, came with a significant trend reversal. In 2022, the top 9 providers only marginally underperformed in their growth share. While they accounted for 13.6% of SIL spending, they accounted for 9.61% of all SIL growth. In 2023, major providers lost substantial market share, and their share of growth was a marginal 1.1%.

This is such a significant finding in the context of the scheme implementation. In my ten years in the NDIS, it was always assumed that the major, legacy not-for-profits had the size, professionalism and infrastructure to dominate the SIL market. To some extent, this was true for much of the scheme’s history. We began seeing hints that consumers preferred smaller, more bespoke options that leveraged their choice and control in 2021, but it appeared that most people couldn’t exercise this control. In the year leading to 2023, it happened, and it happened at a critical level. SIL customer preferences (and their intermediates) has undertaken a sudden and dramatic shift.

There are many potential explanations for this trend reversal. An optimistic perspective is that providers offering unique, tailored solutions can access and connect with participants who prefer their services. A “grey” perspective is that intermediaries have formed strong preferences, and their influence is shifting customers away from major providers. Finally, the barrage of publications focusing on major providers, including the NDIS review, QSC's Own Motion and the Royal Commission, may have had a greater impact on provider brands than initially anticipated. At any rate, changes in preferences in any direction are likely positive, as they reflect some form of purchasing power that has typically eluded the SIL market since the scheme's inception.

What does this have to do with margin?

Everything. A quick note, not-for-profits have substantial advantages (ironically) in generating profit in their SIL programs. The cost model does not include provisions for payroll tax or company tax, and most for-profit providers cannot access salary sacrifice. This can add an additional ~4% of expenses in a market where the cost model suggests a 2% margin.

Despite significant tax advantages, the top 10 providers reported an interesting 2022 financial year.

Names have been changed to protect the innocent, the Y axis is profit in millions, and the X axis is normalised growth (if you’re curious about how that works, read it here). It is important to recall that the top 10 are large, generally, multi-disciplinary organisations that are operating in multiple markets to serve their communities, so one cannot draw direct causal conclusions. But it is worth noting that SIL represents substantial components of their revenue, and assuming their other programs function viably, we can make one very important inference about SIL.

In 2023 we saw broad losses and market share loss. This is a crucial finding because it demonstrates that either the additional expenses did not resonate with prospective clients (or offer little perceived value) or the additional expenses aren’t intersecting with the client experience.

Putting this in context, over 5000 SIL participants entered the market in that time, and despite making substantial losses (which one would hope furnishes a level of support beyond the amount in the plan), most new customers chose alternatives to the top 10. Outside of the top 10, we see providers with payroll tax and dividend obligations that essentially require them to operate at an equivalent 9% margin.

For the first time, we have solid, direct evidence of preference changes in the NDIS. Financial losses are coupled with market share loss, indicating that expenditure patterns may not be optimised towards client expectations. Indeed, it is precisely because of their size and balance sheets that large providers can effectively subsidise plans, which means subsidies of this scale are unlikely to be present in the smaller end of town where nearly all the growth was accrued. In fact, if the opposite were true, and the unit price was woefully inadequate, and major not-for-profits were effectively subsidising the scheme to keep it safe, we would have observed the opposite effect. This only leaves a few alternatives to consider.

There is no doubt that large providers face substantially more risk and that risks scale non-linearly with new staff and clients. Right now, these expenses are, to some degree, subsidised by loss-making positions. Indeed, one doesn’t have to go too far back to hear cries of a “a different unit price for large providers”. This year, SIL clients put this question to bed: they had access to large-scale, subsidised services but didn’t buy them.

Market failure

Perhaps a more alarming finding is that in the previous year, the NDIS placed 5000 SIL participants (broadly the size of the top 10), with little engagement with the top 10. This finding implies that the SIL market could sustain several large-scale insolvencies or withdrawals without facing market failure.

Having worked in major not-for-profits, looming market failure can be an important negotiating tool. Unfortunately, the scheme in its current form has taken that chip off the table. This is also likely to influence the bargaining power of the two major peak bodies that face off with the NDIA.

Is sustained growth possible?

As we’ve seen repeatedly, the best outcomes are the product of a consistent, committed team with highly personalised options that reflect the individuals’ goals and desires. We rarely see an organisation that can uniformly create this experience for their customers across a large area or cohort. We’ve seen very clever and committed people attempt to industrialise this experience, leveraging the best research and tools available. Unfortunately, when given a choice, many people perceive that proximity to the CEO or owner is the best proxy for service quality that can be managed.

Conversely, the large not-for-profits are some of the scheme's most regulated and watched organisations. If the change in customer preference reflects perverse arrangements with conflicted providers, then the damage done to the scheme and the safety of participants would be enormous. While it is difficult for major providers to provide person-centred experiences uniformly, they are also extremely unlikely to commit fraud (just look at the P&Ls); it is extremely important to develop robust anti-fraud mechanisms now that a convenient and probably unintentional anti-fraud mechanism (big provider market concentration) is unravelling.

The darkest perspective

While I can’t point to the data that demonstrates this (but it would be possible to do), it is also possible that the major providers have been the target of plan cuts and plan changes. This would have the effect of both eliminating margins and creating the appearance of a substantial market share loss. While truly Machiavellian, if true, we’re yet to see convincing evidence of this occurring, but I will happily analyse and publish on this topic if I am supplied with it.

Putting it all together

Recently, Minister Shorten announced an intended 8% scheme cap, and we explored the implications of it here. Concurrently, an NDIS price guide was released where most providers lost against inflation in an already difficult labour market (see more here). These facts, combined with changing customer preferences and seismic market share shifts, indicate that the SIL market will experience substantial change. Most interesting to contemplate is provider behaviour in a SIL market where the number of new entrants drops dramatically, and preferences are relatively fluid.

These broad macro trends are coupled with smaller trends that influence how SIL is provided. Firstly, it appears that the QSC may alter the practice standards to focus on active support and practice leadership. These highly beneficial practices take time to scale and require genuine engagement from committed staff and leaders. This makes the prospect of expansion somewhat difficult for major providers.

Secondly, the proposal of home and living coordinators in response to the dreadful self-advocacy rates in SIL suggest that the behaviour of new market entrants is likely to generalise to the broader SIL cohort. Indeed, with the support of a home and living coordinator, the entire SIL cohort will effectively become new entrants from the market’s perspective. This year, we’ve seen that new entrants had very particular preferences that could be difficult for large providers to manage.

SIL vacancies are still unfunded, and a home and living coordinator arrangement will likely have a piecemeal effect. If 40% of participants used this, then nearly every group home in Australia would have a vacancy (assuming they shift away from incumbents), which few providers could tolerate for more than six months.

The participant perspective

Finally, we’re seeing genuine choice be offered to NDIS SIL participants. Home and Living coordinators may be able to extend that choice to SIL participants who may have never had a chance to express their preferences. With calls for independent support coordination and SDA becoming louder, it does appear that the SIL space is moving in the right direction for participants and their rights. Provided this change doesn’t trigger market failure and adequate safeguards are in play to prevent fraud. I’m excited to see NDIS participants benefiting from competitive pressures to raise the standard of SIL and SDA nationally.

Encouragingly, some providers have anticipated these trends. Rather than contemplate “what can we possibly do to restrict the choice of our participants” (which we have seen), their responses are right. Their view is “we simply have to offer the best service and value possible to participants”. In the best cases, this has meant developing specialised offers involving unique trade-offs that create genuine value. In other cases, it means investing the benefits of long-term financial responsibility into truly world-class SDA (which we have just seen in Darwin). At any rate, most of the appalling conditions seen in SIL are the direct cause of limited client choice. Customer preferences are gaining momentum, and conditions are finally developing into a market where the participant is treated fairly. Providers who don’t have a plan to get away from legacy government stock or offer little in the way of genuine value in the form of skills, training and development of their staff will find a reckoning in the coming years.

Wrapping up

SIL is only becoming more competitive, and now participants are exercising their choice and control. Providers across the scheme must ask themselves, “What is important to my customers,” and how do I rank compared to the competitor set? Any provider that attempts this exercise across the entire scheme will lose out to niche offers that uniquely target the utility function of their client base. Fundamentally, the increase in participant control has created a genuine need for a competitive strategy aligned with serviceable market segments. We predicted these trends would unfold, but we had little idea they would happen this quickly. Hold onto your hats for 2024.