Fee Capping on Home Care Packages

Approaches to Fee Setting

The ALP promised as a part of their election campaign platform to cap Package Management and Care Management (PM&CM) Charges for Home Care Packages. This promise has now been fulfilled with the announcement last week that all organisations will be required to cap their Care Management fee at 20% of package funding, and Package Management fees at 15%.

This change reflects a frustration on the part of consumers that they are charged a significant amount of their available package funding for services they don’t feel they get enough value from, and have little control over. In many cases more than a third of the funding is being absorbed in these fixed charges.

There are two approaches that Home Care organisations have taken to pricing since 2017. The first has been to charge higher rates for the variable costs of service, such as the direct care hours and keep the PM&CM fees low. The other has been to charge a lower amount for direct costs, and a higher amount for PM&CM.

The market dynamic has clearly been that consumers have a preference for the first approach as it gives the illusion of increased control over costs generally. There is however a clear risk management advantage in the second approach for organisations as it more closely matches the fixed/variable cost profile of their financial structures.

Interestingly, our analysis over the years was that neither provides significant revenue advantage for organisations or cost advantage for consumers. When a standard package of care is applied across a wide sample of organisations, both strategies deliver similar results. That is, regardless of what pricing strategy you use, the average consumer is not being overcharged. This conclusion is supported by the fact that very few organisations are making out-sized profits.

My view since the introduction of the Home Care Package program is that the better approach to pricing has been to keep the PM&CM charges low, and charge a higher hourly service rate. This is because it provides a marketing advantage. The risks created by the mismatch between the fee structure and the cost structure are manageable, and are no different to those being faced on the CHSP, NDIS, and DVA programs, along with many others.

But while the fee capping is the headline, there is actually a lot more in this announcement that will be difficult for organisations to address in such a short period of time. And as with every announcement, there is hidden information regarding the ideological direction of the reform program. So let’s address the practicalities of implementing these changes, and discuss what we can glean from the announcement regarding the direction of reform.

The Changes and the Operational Implications

The important changes are as follows:

1. Package Management and Care Management Fees to be capped

2. Package Management Fees cannot be charged in calendar months where no services are being delivered.

3. Third party services are not to be charged for separately, and full price must be agreed with customers up front.

4. Administrative differences in charging fees depending on whether third party services are required by the organisation or requested by the customer

5. No exit fees

The headline change is clearly the capping of fees for PM&CM. I would suggest that this is more optics than significant policy change. It is pushing all organisations towards a position which the market was delivering anyway in line with customer preference. It appears from early feedback that many organisations comply with the capping already (although I haven’t personally done any analysis on this). Those that don’t however are in for a torrid few weeks before Christmas.

On the face of it, this change looks easy to implement, and the Department has given an expedited customer consultation approach to assist. Dig a little deeper however, and it’s not as easy as it looks.

The first point to note is that all of these changes represent a loss of revenue for organisations. This means that while lowering fees for customers is relatively easy to do, it needs to be offset with increases in other areas if financial viability is not to be compromised.

This makes the expedited consumer consultation arrangements redundant for most organisations, and highlights a shortfall in the Department’s understanding of how the industry prices its services, and runs its processes. It also means that fee increases in a number of areas need to be implemented and processed out of cycle. Simply notifying your customers that you are reducing the PM&CM charges, not charging fees in some months, removing third party processing fees, or cancelling exit fees is straightforward. Negotiating with each customer independently in order to increase offsetting charges is much more time consuming, uncertain in its results, and undermines key assumptions in budgets.

In addition, almost every organisation is going to need to address the administrative and IT issues around not billing Package Management fees in non-service calendar months, and third party purchases. None of these are small tasks. Even if software providers can deliver this change in their systems before the first statement distribution in early February, a significant change management plan will be required within organisations to ensure all customers and staff know what the changes are, and for staff, what this means for their roles.

What is additionally unhelpful is that it requires extensive work for organisations around customer communication, frontline staff communication, renegotiation of customer contracts, IT changes, revenue model recalibration, and change management processes within customer facing teams. All this in the five weeks before Christmas while the attention of customers, front line staff, and administration teams are focused on a range of other deadlines.

Insights into Future Reform Direction

What do these changes tell us about the ideological direction of the reform program.

First, we are definitely trending towards increased price regulation. The decisions around pricing are arguably the most important in the reform program. This is because the structure of funding will drive economic incentives across the industry, and define the ultimate priorities for investment, and the behaviour of the entire industry.

At this stage, I will not be surprised to see fixed pricing in the final reform package. This is not assured, but would be detrimental to consumers, the industry, and the Commonwealth fiscal position in the long term. It does appear to be the direction we’re heading however. I’ll have a lot more to say about this in the coming weeks.

Second, the Department of Health and Aged Care has continued their track record of giving nowhere near enough time to implement the changes well, and has inadvertently provided a couple of little grenades that are going to represent a significant challenge for most organisations. Once again, there doesn’t appear to be much understanding from the Department regarding the practical steps that are needed to put these changes into effect, particularly in such a short period of time. This does not bode well for future, larger, change management programs.

Having said this, all of these changes have been expected for some time. There is nothing in this announcement that I wasn’t aware of as a CEO in the first half of the year. Forward looking organisations will have addressed these before the detail was known, and prepared plans that could be modified and implemented quickly. Many others however will have been too busy managing the day to day issues within their businesses and left it until they had certainty to address. It has been my experience that announcements of this nature are usually made far too late to address properly, and pre-planning is needed.

Good planning processes in this industry are vitally important. Provided nothing further arises of note in the next week, I will address this issue of planning in an environment of uncertainty in a blog post next week.

In the meantime, if you need any assistance with this or any future financial and strategic challenges, we’re here to help. Please feel free to email me directly at jason.howie@howiefsc.com.au if I can be of assistance.

https://www.health.gov.au/news/newsletters/home-care-packages-program-update-november-2022