Price caps keep costs under control but don’t necessarily increase supply, researchers find.
Price cap changes drive provider prices, but they don’t have a huge impact on supply in the short term – that’s one of the lessons from watching what happened with NDIS services after the price cap changes on July 1 last year, according to research published today.
A research note authored by economics research think tank e61 said these findings “have direct implications for pricing policy and market design”.
The researchers set out to see how changing NDIA-approved service price caps, which are a way for governments to retain some control over NDIS spending, affected the charges providers levied on NDIS participants and the supply of those services.
They found that price caps played a central role in shaping market prices, that reducing caps only modestly affected the amount of services provided in the short term, mostly for services that had the biggest cap reduction, and that cap increases did not result in a greater supply of services.
“Understanding these dynamics is essential for predicting how cap adjustments affect the scheme’s dual objectives of affordability and access,” they said.
“In practice, capacity constraints typically dominate in the short run, meaning total hours supplied change little even when caps increase. Over time, sustained higher margins may attract entry or expansion, but this adjustment is slow,” the researchers wrote.
“The net supply effect depends on how close providers’ costs are to the new cap. If the cap falls below many providers’ cost structures, significant exits may occur. These mechanisms imply asymmetric quantity responses: capacity can be lost relatively quickly through exit or service reduction, but is slower to expand through entry or hiring.”
NDIS participants needed their services and would have to get them whether prices went up or not, the researchers noted. Individual budgets were indexed to those caps, and the money from those plans couldn’t be easily redirected to something else, so competition didn’t really come into pricing; but reducing caps could lead to providers avoiding more complex cases, reduce service quality or getting out of the game altogether.
Using data from NDIS plan manager Kismet, researchers looked at the effect of cap changes introduced as a result of the 2024–25 Pricing Review, on both prices and supply.
On July 1 2025, legislated price caps went up for 50% of NDIA-approved services (assistance with daily living, delivery of health supports, intensive and complex behaviour supports, psychology only in NSW, Vic, QLD and ACT, and group activities). These were areas where existing price caps didn’t properly take into account workforce pressures and underlying costs, including labour costs for nurses and disability support workers, the report explained.
For every 1% increase in the cap, prices charged by providers for those services went up sharply on the same day as the cap did, and then a little over following weeks, by 0.61% overall (controlling for supplier, service type, location, state, region and day-of-week patterns). Providers who were charging close to the previous cap, as well as those “well below”, all put their prices up.
The number of hours provided against those services remained the same “in the short run”, despite the price rises.
At the same time, the price cap was reduced for 4% of NDIA-approved services (physiotherapy (up to 18.1% in WA, SA, Tas and NT), podiatry, dietitian services, monthly plan management fee, and psychology only in WA, SA, Tas and NT) by an average of 8.9%.
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For every 1% decrease in the cap, prices charged by providers for those services went down by 0.9%. Prices went down from all providers by an average of 8%, but those previously charging at or within 5% of the cap dropped their price by 1.11% for each 1% cap drop and those with “pricing headroom” dropping their price by 0.29%. Again, the prices changed mostly on the day of the price cap changes.
The number of hours provided against those services “remained broadly stable” but went down slightly for services that saw the biggest price cap decreases (declining overall by three minutes per provider, per day).
Many caps (46%) did not change (occupational therapy, speech pathology, support coordination) and those providers did not change their prices; nor were there any changes in the number of hours those services were provided. This was a useful comparison group, showing that price cap changes – rather than other price pressures – were the significant driver of provider price, the researchers noted.
“We observe an asymmetry in how prices respond to cap changes. When caps increase, prices rise across all providers, including those with pricing headroom,” the researchers wrote.
“When caps decrease, pass-through is highly uneven. Providers pricing close to the cap prior to July 1 reduce prices more than one-for-one with the cap and contract service provision, indicating that cap reductions might bind for high-price providers and push some below viable operating levels.
“In contrast, providers pricing further below the cap exhibit limited price pass-through with no change in service provision.
“This asymmetry implies that cap increases may raise provider revenues while cap decreases might reduce expenditure by constraining high-price providers, though with some risk to supply among providers pushed below viable pricing levels.
“With scheme expenditure and participant numbers continuing to grow, these results suggest that price cap adjustments affect both expenditure and service provision, highlighting a trade-off that warrants ongoing monitoring of provider behaviour over time.”
The report looked at physiotherapy as a case study, where the biggest price cap reductions happened. It went down from $193.99 in eastern mainland states and $224.62 elsewhere, to a uniform national cap of $183.99.
That’s a 5.2% and 18.1% reduction, respectively, and 10.8% decrease overall. The average price across the country went down by 9.1%.
In eastern mainland states, a 1% reduction in price caps decreased market prices by 0.85%; 0.83% elsewhere.
The number of hours of physiotherapy services went down around the country by 4.4% (around 2.3 minutes per provider, per day).
“While modest in absolute terms, the immediacy of these responses suggests that short-run supply adjustments can occur in response to a price cap decrease,” the researchers wrote.
The psychology price cap went up from $222.99 in eastern mainland states and down from $244.22 in WA, SA, Tasmania and NT to a uniform $232.99 around Australia.
Where the caps went up there was a 0.63% rise in prices for every 1% cap increase; and there was no change in the number of hours of service provided despite the price rises.
Where caps went down there was a 0.69% fall in prices for every 1% cap decrease; and service provision was reduced by approximately 3.8 minutes per supplier, per day (5.8% lower than before the price cap change).
“These results are consistent with price caps strongly shaping market prices, with providers adjusting prices within days of the cap change, whether caps move up or down, while short-run supply responses are limited and appear more likely to emerge when caps are reduced rather than increased,” the research said.
As the report points out, these price cap changes were made along with tighter limits on billable travel time for therapy supports, the removal of remote and very remote loadings for plan-management, monthly fees, and the transition to nationally consistent pricing for therapy professions previously priced differently across jurisdictions.
Furthermore, the researchers noted that their work did not reflect how price cap changes might affect the quality or intensity of services provided.
“We observe how providers adjust prices and hours, but not how the services participants receive may change in less visible ways, such as shorter sessions, less intensive support, or the avoidance of more complex cases (Gaynor et al., 2015),” they wrote.
“Incorporating quality measures would be important for understanding the broader welfare impacts of pricing reforms, including how changes in regulated prices may affect service delivery beyond observed prices and hours.”
Read the full report here.