Support at Home: Why it will likely cost more than Home Care Packages

Since the Support at Home (SaH) program design was first proposed in January 2022, we’ve been thinking about how it will affect the key stakeholder groups. While the new system aims to manage costs, we believe it could limit flexibility and choice for clients and raise costs for the Government.

In this Insight, we examine how we expect the program to play out, particularly with its approach to managing system costs by capping hourly costs. While this method seeks to control expenses, it could result in increased total hours of service being delivered, much like we’ve seen with the NDIS. 

It’s important to note that we believe the new design is both sustainable and workable, but the purpose of this discussion is to highlight the gains and losses from these changes.

1. Quarterly Budgets

The current system of open-ended budgets puts significant downward pressure on the hours of service delivered. StewartBrown reports that the average utilisation of funds on Home Care Package (HCP) contracts is 85%, meaning 15% of funds go unused or are “recycled”. In some organisations I’ve worked with, the recycled funds are higher due to inefficient internal processes rather than consumer needs. 

The issue lies in the incentives inherent in open-ended budgets. While the Government has indicated a desire for more funds to be spent, it’s unclear why. Organisations are certainly incentivised to increase utilisation as it boosts their margin and revenue. However, consumers may save funds for a “rainy day”, don’t need all the allocated funds, or simply don’t want the additional intrusion into their lives and are satisfied with the service they receive.

Research suggests unused funds are rarely used in a “rainy day” context; instead, they are recycled into increasing package numbers and reducing waitlists. 

With quarterly budgets, there’s a clear target for both consumers and providers, eliminating the incentive for consumers to save funds. It’s expected that both consumers and providers will become experts at spending up to the package limits each quarter.  In fact, within two years, we wouldn’t be surprised if the average package utilisation hits closer to 95% - a 10% increase in costs.

The key question remains: Are we getting the right value for this extra spend? At this stage, consumer complaints focus more on waitlists than insufficient services. The SaH system will reduce the available funding to reduce waitlists, while increasing service hours for existing clients - with no identifiable benefit.

2. Pricing caps

We’re not convinced that capping hourly costs is the best move.  The introduction of an independent pricing authority (IHACPA) is a step in the right direction, providing confidence in the sector’s financial sustainability. However, the funder’s exposure is to the quarterly budget, not the hourly rate. Capping (or effectively fixing) prices carries significant downsides with little identifiable upside. Any gains in consumer protection could be achieved by using consumer protection measures adopted elsewhere in the economy.

Under the current market pricing regime, the industry has maintained an average profitability of 4%, with over 30% of organisations reporting losses. It’s unclear what pricing controls will deliver that the market has not, other than to attract political risk for Government.

The delay in capping pricing will reduce risk for organisations around this issue, as most will adjust their pricing to leave consumers no better or worse off on average. This approach allows IHACPA to see the link between pricing and profitability in a real-world environment.

There are numerous reasons hours are likely to increase in response to this stimulus, but the most important is the reduction of short shifts. A 15-minute visit costs more than 25% of a one-hour visit due to the fixed costs of transportation, administration, and scheduling. Organisations offering short visits typically charge higher hourly rates to compensate. For example, a 15-minute visit may cost 40% of a 1-hour visit.

Capping prices will make this type of scheduling unworkable and economically unviable, forcing longer visits that don’t necessarily add value but just help meet the new pricing structure.

3. Changes to consumer behaviour from changes to client contributions

A key aspect of the SaH program is the way it changes consumer behaviour. Consider an (admittedly unrealistic) self-funded retiree with a Level 4 $30,000 package, allocating 50% to Clinical Services and 50% to Everyday Living Services.

The SaH program will charge them 80% of the $15,000 spent on Everyday Living services - $12,000 annually - while Clinical Services remain free. Department modelling assumes the package will cost Treasury $18,000.

The incentives work differently, however. After price regulation, Everyday Living services will likely exceed $110 per hour. Instead of paying $88 per hour (80% of $110), the consumer could opt for non-approved providers at $65 per hour, spending around $8,900 annually - saving $3,100. These providers have lower IR and regulatory costs, giving them a significant pricing advantage. The broader social cost of this is another discussion.

With these costs shifted off-budget, the full $15,000 remains available for other services. In our example, the organisation, assessor and consumer may ‘work together’ to redirect these funds towards Clinical Services by increasing support, extending service visits, or stretching the definition of clinical care.

The result? The total services received in aged care budget dollars increase to $45,000. Instead of the expected $18,000, the Department ends up funding $30,000, while the consumer pays $8,900 for what was originally budgeted as $15,000 in Everyday Living expenses.

While this consumer does not exist, consumer funding decisions exist on a continuum, and a multitude of smaller decisions made by real consumers with a real service mix between Everyday Living, Independence and Clinical Services will add up across the system, creating a similar outcome.

No amount of regulation can counteract a system where all stakeholder groups are aligned in their incentives and will find a way to game this element of the system. You can’t regulate in what you’ve incentivised out.

4. Funding inflexibility

A concern with external assessment services is their responsiveness to changing needs.

While additional flexibility has been built into the system to manage reassessment delays - a positive financial outcome – there’s a risk of unintended consequences.

If significant delays arise, assessors may compensate by increasing assessment levels of consumers. This has already occurred in parts of the existing HCP program. When unsure of timely follow-ups, assessors often assess based on anticipated future needs rather than current ones, aiming to reduce the risk to consumers and reduce their own workload.

This, in turn, expands budgets, particularly for highly subsidised client groups or service categories.

5. Loss of future productivity gains

The current HCP program incentivises organisations to reduce labour costs in several ways -  by substituting technology for labour, substituting informal supports for paid labour, and creating innovative ways to shorten service visits.

We’ve already addressed the impact of shorter visits, but it’s worth considering how a narrowly defined service list affects the first two.

Setting up and maintaining these service models is costly and will only occur if a financial return supports a business case. In the existing system, this return comes from freeing up budget, increasing prices, and sharing the benefits of innovation with consumers. Consumers receive more services, while organisations gain a slightly higher margin to cover commercial risk and ongoing costs.

A narrowly defined service list removes these incentives. If you only pay for hours of service, all you will get is hours of service.

6. Loss of technology-based innovation

Turning our attention to the system's future, we are likely to find that a more regulated pricing system could stifle the innovation we need in this sector.

Capping (or fixing) prices will commoditise services, as seen in the NDIS. When delivering a commodity, the path to success is to deliver the lowest-cost compliant service.

Technological innovation is just reaching a point where it could significantly impact the cost of delivering home-based services. The current system would incentivise these services, allowing for pricing flexibility and a broader range of services with an objectives-based approach.

Narrowly defining eligible services and capping prices will make it almost impossible for business cases around these innovations to get across the line.

Many emerging technologies are rapidly becoming available that could make a meaningful impact here, including:

• AI to assess data to provide early warning for interventions or reduce clinical visits where the risk is low.
• Self-driving vehicles to increase workforce availability and lower transport costs.
• Robotics to assist with in-home tasks, reducing reliance on frontline staff for certain tasks.

Implementing these technologies requires significant investment, and if the system does not allow a financial return on them, executive teams won’t consider them.

Preparing for Change

At Pride Aged Living, we’re here to help you prepare for the changes ahead. We have experience assisting organisations to become financially sustainable and navigating the changes we’re likely to see concerning competitive behaviours and service designs in response to the incentives built into the new system. Contact us to explore strategies for staying competitive and financially viable in the new Support at Home system.

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