In an announcement panned as "cuts, cuts, cuts" by the opposition and described as frightening by disability advocates, Health Minister Mark Butler revealed major changes, which includes tougher eligibility rules, mandatory registration for some providers and better-quality support.
Under the overhaul, which will form the centrepiece of Labor's savings in the May budget, all participants' eligibility for NDIS support will be reassessed using a new standardised disability evaluation, focusing on how much their condition impairs their day-to-day life.
The current system is based on whether a person's disability lines up with a list of diagnoses.
Those who are no longer eligible would be given support under new, state-run programs known as foundational supports - most of which are yet to be developed.
Mr Butler said the NDIS was costing too much and growing too fast, declaring it was too important to be allowed to fail.
"Unless we take action to make it sustainable, it simply will not be there in the future for the Australians who need it most," he told the National Press Club on Wednesday.
Mr Butler said he hoped the revised entry rules would be in place by the beginning of 2028.
The government is aiming to reduce the number of people on the NDIS from about 760,000 to 600,000 by the end of the 2020s - a significant reduction on the current forecast of more than 900,000.
The changes would reduce the average cost of each participant's support plan to $26,000, down from $31,000 in 2026 and in line with figures from 2023.
The overall cost of the NDIS is forecast to reach $70 billion annually by 2030, but Mr Butler said under his plan, that would be restricted to $55 billion by the end of the decade.
Spending rises of only two per cent per year - well below the current rate of inflation - were targeted for the coming four years, after which growth would return to the government's long-term goal of about five per cent.
Disability advocates called for more detail about the eligibility changes, offering to work with the government to ensure Australians in need of support aren't left behind.
"160,000 people will lose access to the scheme if we utilise (the government's) numbers. That's a frightening amount," People With Disability Australia president Jeremy Hope told reporters in Canberra.
Mandatory registration will be imposed on NDIS providers who offer personal care, daily living supports and help in closed settings. About 10 per cent of existing providers are registered.
"Many of these people provide valuable support to participants, but others have no qualifications or background in disability services and seem more interested – too often – in clipping the ticket," Mr Butler said.
Laws putting in place the NDIS overhaul will be introduced in May, when federal parliament returns for the budget.
Inclusion Australia chief executive Maeve Kennedy implored the government to build up the new system of foundational supports before kicking people off the scheme.
"You can't burn the house down until there's somewhere else for people to go," she said.
More detail was needed on how the government would weed out fraudulent operators from the scheme and improve the quality of providers, Opposition NDIS spokeswoman Melissa McIntosh said.
"(The message was) cuts, cuts, cuts: yet he had no detail on how this is going to be achieved," she said.
One of the inaugural directors of the National Disability Insurance Agency, which administers the scheme, said the reforms struck the right balance between cutting costs and supporting vulnerable Australians.
"This secures the NDIS' future ... the five per cent growth target is essential to maintain taxpayer support," Martin Laverty - now the chief executive of aged care provider ARUMA - told AAP.
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