Unpacking the ACCC pricing inquiry Interim Report – Some observations and insights

The Australian Competition and Consumer Commission (ACCC) has released its interim report for the inquiry into the market for the supply of early childhood education and care (ECEC) services in which prices, supply and demand and the child care subsidy impact are examined.

 

The release marks the first of three deliverables, with a consultation paper identifying potential draft recommendations and/or draft findings expected in September and the final report due by the end of the year. 

 

The key focuses of the Interim Report are an initial exploration of the composition of the ECEC sector by service type and location, how families select a service for their children, what average prices look like across settings, geographies, socio economic areas and governance types as well as a preliminary look at how the Child Care Subsidy (CCS) impacts affordability. 

 

The report provides a good summary of the “what” and “where” of ECEC pricing but does not provide any substantive insights into “why” prices are where they are and “why” providers behave in the way they do when it comes to price decisions. 

 

To uncover the “why” the ACCC will explore in more detail the factors that drive prices, including a thorough review of the costs incurred by providers to deliver ECEC services, in upcoming releases. 

 

Nevertheless, there are some interesting observations and data points in the interim report that are explored below. 

 

Observation 1 – Average LDC fees increased by 20% since Sept 2018, or 4.7% per year 

 

The average daily fee for centre based care increased 20 per cent ($20.61 per day) between the September quarter 2018 and the December quarter 2022 which equals around a 4.7 per cent increase per annum or 4.0 per cent adjusted for inflation.  

 

Comment – This data has been sourced from the Department of Education Child Care in Australia reports and is readily available on the public record. It’s important to note that the period under review includes the COVID-19 pandemic which saw a material slowdown in price increases and that price rises over the last 12 months are annualising at 7.3 per cent.

 

Observation 2 – LDC fees are higher in areas that have a higher density of centres

 

At a national level the average daily fee for centre based day care services is higher in areas with more services within a two kilometre radius of one another, with New South Wales and Victoria showing strong correlations with this trend. 

 

Comment – As noted earlier in the report density levels of services tend to be higher in areas of socio economic advantage which is likely the key driver of this trend. With a higher propensity to support high prices, operators tend to cluster their services and price accordingly. The reverse is true for lower socio economic areas on average. 

 

Observation 3 – For profit services generally charge more than not for profit services 

 

On a national level, the ACCC found that the average hourly fee was higher in for-profit services compared to not-for-profit services, across all service types, except family day care. The difference in LDC settings was noted as seven per cent. 

 

Comment – As noted above the Interim report falls short of explaining why prices differ so any comment on the for profit / not for profit differences is premature however, factors such as the absence of payroll tax requirements afforded to not for profit organisations may help to explain a substantial amount of the difference. 

 

Observation 4 – For profit and not for profit services are raising fees at similar rates 

 

For centre based day care, average daily fees for both for-profit and not-for-profit services increased by about 20 per centand 19 per cent, respectively between September 2018 and December 2022. 

 

Comment – The similar fee increase behaviour of centre based care providers, regardless of governance type, in the four year period ending December 2022 tends to suggest that operators are arriving at broadly consistent price increase conclusions despite having quite different organisational structures and philosophies. 

 

Observation 5 – Large LDC providers charge higher average fees across Australia

 

The average daily fee for centre based day care is highest for large providers (40 or more centres), regardless of governance type, with fees on average 9 per cent more than medium providers (5 to 39 centres), and 11 per cent more than small providers (less than five centres).

 

Comment – This is a new and interesting insight which is most likely explained by higher cost structures in the larger providers, however the ACCC reserved judgment on this noting that the relationship between price and cost structures will be explored over the remainder of the inquiry. 

 

Observation 6 – Higher quality services had higher fees but only just

 

For centre based day care, there is a general trend for higher quality rated services to charge a higher fee but the ACCC found that the variance between the average fee for each quality rating is small (less than $1 per hour). 

 

Comment – This is notable and although somewhat disappointing because it confirms yet again that quality as measured by the National Quality Standard is not valued sufficiently by parents to justify price differentials, a finding which is consistent with ACECQA’s Family surveys which signal that more informal quality indicators like cleanliness, educational programs and qualifications and skills of the educators are preferred by parents, over and above formal quality ratings. 

 

Observation 7 – One in five LDC’s charge fees above the daily CCS rate cap

 

22 per cent of centre based day care services charged an average hourly fee above the hourly rate cap of $12.74 in the December quarter 2022, up from just 12 per cent in Q1 2019.

 

Comment – The increasing proportion of services charging more than the hourly fee cap has been well documented in recent years and is a natural consequence of fees rising at a faster rate than the fee cap. However, looking ahead this will change with the most recent increase to the fee cap amounting to 7.8 per cent, nearly double that passed last year.

 

Observation 8 – Average out of pocket expenses have decreased since 2018

 

Since 2018, the average out-of-pocket expense has increased across LDC, FDC and outside school hours care service but once adjusted for inflation the average out-of-pocket expense decreased, or stayed the same (FDC), meaning that the increase in fees was more than offset by an increase in the amount of subsidy paid to households.

 

Comment – The ongoing trend to provide greater amounts of subsidy to families has helped mitigate the impact of higher prices. The increased importance of early learning from a political perspective has underwritten this with the latest round of affordability measures a continuation of a trend that has been in place for many years. 

 

Observation 9 – ECEC costs can be up to 20% of disposable income for poorer families 

 

Families from the lowest socio economic areas are in some cases seeing child care out of pocket expenses exceed 20 per cent of disposable income compared to more affluent families below 10 per cent. 

 

Comment – The inability of the current CCS system to calibrate effectively the relative cost of care for lower socio economic areas is notable with mechanisms like the activity test a possible amplifier of this dynamic. 

 

The next deliverable from the ACCC commission ECEC prices inquiry will be a consultation paper which importantly will include a review of provider price increase behaviour and around the implementation of new affordability measures due on 10 July 2023 as well as greater insights into why prices vary across the sector and a sense of the ACCC’s overall views on the effectiveness of existing price regulation mechanisms currently in play across the sector. 

 

To review the Interim Report click here.