Disability support providers may stop accepting new clients and some services may close because of a freeze in government funding.
This year's Budget allocated a record $72 million extra per year to deal with cost pressures in disability services.
But the Ministry of Health has told providers this new money will be spent on achieving gender pay equity and meeting growing demand.
It has written to say it will not be paying more for contracts.
CCS Disability Action provides a range of support services to about 5000 people.
It's a $50m operation, receiving about $30m in annual government contracts.
Its chief executive David Matthews said news of no funding increases follows minimal increases in the past decade, and CCS is feeling the pinch.
The organisation has already cut back on its charity services, such as giving advice to families; working with councils on accessibility; and advocacy work.
"We are doing less in those areas where we use those resources that have come from our charitable purposes - doing less of that - and using that money to fund the shortfall for government money," Mr Matthews said.
"So we are subsidising government at this moment to provide quality services to people in the community," he said.
Mr Matthews said using charitable dollars and drawing down on reserves to supplement the government funding is not sustainable.
He estimates CCS would only last another two or three years, at most.
"I have boards who are asking the question whether we should stay in this work because clearly the government does not value this work in terms of the price it is willing to pay for services, even though we've been in this work for 80 plus years," he said.
CCS Disability Action is not alone.
Garth Bennie is the chief executive of the Disability Support Network, an umbrella organisation representing a wide range of providers.
Dr Bennie said their costs are rising and that is not reflected in government contracts.
"Rates, rent, petrol prices, some food prices, they are all going up. In addition, there are collective negotiations, almost ongoing, putting pressure on better terms and conditions, in addition to pay rates for support workers. Those extra costs are not funded either," he said.
The Health Ministry's letter, sent two weeks ago, says the $72m in the Budget was the largest increase for Disability Support Services cost pressures ever.
But it will be used to meet gender pay equity obligations and growing demand, and not to cover the increasing cost of living.
Dr Bennie said this meant service providers would receive no extra funding per client, even though the costs of providing services to them have risen.
Providers would have to make some tough choices, he said.
"Providers are now in a position where they have to seriously consider whether they accept those new referrals because they're coming with funding that it is not meeting the full cost of providing that service and if they take that person into their service they then have to spread the funding more thinly across all the people they serve," he said.
Dr Bennie said the decision not to increase contract prices means the gap between annual funding and the real costs of service has grown from 12 to 15 percent, leaving the sector about $200m short each year.
"It's cost cutting by stealth," he said.
National's health spokesperson, Michael Woodhouse, said the letter made it clear the ministry does not have enough money.
"It just strikes me that the ministry are sweating on a budget, that they know they can't deliver the existing service with," he said.
David Matthews from CCS has this message for the government.
"You could find extra money to pay teachers, you can find money to stop parents having to pay voluntarily donations. Why can you not do that for the disability sector? We're only talking about $150-$200 million which if you look at it in terms of overall government spending is a drop in the ocean. But in terms of overall government spending it would make such a difference," he said.
Associate Health Minister Julie Anne Genter declined to comment, saying it's an operational matter.
In a statement, the Ministry of Health's deputy director-general disability, Adri Isbister, said the government has made it clear there will not be cuts to services and support for disabled people.
Disabled people and their whānau do not have to worry that they will lose out on support and access to services, she said.
She said the additional $72m per annum allocated to Disability Support Services in this year's Budget meets a significant proportion of the cost pressures being faced by the system.
Increased costs in recent years were mainly due to an increase in the number of people accessing support and services, she said.
She said the ministry's priority was to ensure that disabled people and their whānau could continue to access the services and support they need and in order to do that the ministry would continue to work with providers to ensure they can continue to deliver the services people need.
Disabled people will continue to be involved in these discussions, she said.