National Health Insurance
Public Subsidy of Private Insurance in South Africa
A very necessary comparison is the expenditure by Government on someone using public sector facilities compared to the subsidy given by Government for private health insurance. This is the so-called Tax Expenditure Subsidy (TES) which arises because of the tax break given to people who belong to medical schemes.
Tax expenditure subsidies can be considered to be a leakage of tax revenue. They are often put in place to incentivise a particular activity (for example, subsidies to farmers or to taxi-owners to scrap old vehicles) and then they persist under tax legislation. Because they are not part of the formal annual budget in parliament, they can persist for many years after their purpose has been fulfilled. Many OECD countries include these tax subsidies in the budgeting process each year in order to allow parliament to reconsider whether they are necessary on a regular basis.
The TES for medical scheme membership and medical expenses in South Africa has been in place since well before 1994. The Melamet Commission in 1994 reported that: “the tax deduction ‘encourages consumption of health care beyond the point where the costs of obtaining extra cover equate to the value of the marginal benefits received. Price signals are badly muffled. Medical cost inflation is thus encouraged.’ (Melamet Commission, 1994, p.44)”.
A report from the Centre for Health Policy, lead by Dr Max Price in 1995, was also strongly negative, saying: ‘The subsidisation of this sector by the government is not consistent with the principles of health care funding by the state.’ The calculations showed the cost of the TES to be between R4 billion and R6 billion. The NHI Committee in 1995 also identified serious problems with the existing tax regime.
Writing in 2002, the Department of Health submission to the Taylor Committee11 included a revised estimate of the TES of R7.8 billion. The Ministerial Task Team on Social Health Insurance reported in 2005 that the TES was estimated in 2005 to be R10,1 billion, which in that year was equal to some 20% of the public health budget. At that stage the TES amounted to about R120 pbpm for medical scheme members (and very unequally distributed), while the public sector spend was R96 pbpm.
McIntyre and Van den Heever, commenting on the similarities in proposals for mandatory insurance over the years, wrote: “In relation to general tax resources, a key issue that has been raised since the 1995 Committee of Inquiry is that there should be reform of tax deductions on medical scheme contributions. At present, those with the highest incomes benefit the most from tax deductions. Although the tax deductions have recently been revised [this was in 2006], it has not completely eliminated disparities in tax benefits between higher and lower income earners.”
“The more recent mandatory insurance proposals have recommended that tax deductions on medical scheme contributions should be completely removed, and that instead every South African should receive the same direct subsidy, paid from general tax revenue, towards covering their health care requirements. More specifically, this subsidy would be set at a level that covers the full costs of a basic package of health services at public sector costs (i.e. the subsidy would not be subject to the vagaries of the uncontrolled cost spiral experienced in the private health sector, but would be tied to public sector costs). This subsidy would either be paid to public sector facilities or to the insurance scheme to which the individual belongs.” The graph below illustrates the effect of the tax expenditure subsidy and the per capita (per head) subsidy on individuals in 2007 terms.
Organisation for Economic Co-operation and Development, see www.oecd.org
Figure 4: Effect of Existing Tax Subsidy compared to Effect of Per Capita Subsidy
The graph illustrates the core problem with a tax subsidy, no matter how it is structured: if you are not paying income tax, then there is no subsidy. This means that individuals below the tax threshold get no subsidy while those just above the tax threshold get a small subsidy so that the price of the typical medical scheme falls from 44% of income to 41% of income. At the highest income group, the tax subsidy reduces the cost of a comprehensive package from 6.2% of income to only 4.8% of income.
Despite some important reforms in 2006 to ensure that the self-employed and those who had healthcare provided by the employer received equal treatment, the fact remains that lower income groups cannot afford the same size medical scheme packages as the most wealthy and thus the subsidy they get from Government is smaller.
A further concern with the tax subsidy is that retired people, whose incomes tend to fall in retirement and whose health needs increase, are less likely to get a subsidy for medical scheme membership. The tax threshold also has escalated each year, meaning that if wages do not keep pace with the tax threshold increase, that people get a reduced subsidy.
McIntyre, McLeod and Thiede, writing on the 2006 reforms, argued that “The only way to provide an equitable subsidy to lower income workers is in the form of a direct subsidy to the medical scheme on their behalf. The proposals from the Department of Health for a per capita subsidy to be payable to all would substantially improve affordability of healthcare for lower income workers. This would also be neutral to the fiscus in future.”
The tax break is contrasted in Figure 4 with the proposal of a per capita subsidy. It is shown in the graph that the cost of the typical medical scheme package for those earning below the tax threshold would fall from 44% of income to 28% of income. This is still a very large amount but begins to come within the bounds of possible sharing of costs between workers and employees. The effect on those just above the tax threshold is to reduce costs from 41% of income to 33% while the highest income group pays slightly more, up from 4.8% of income to 5.2%. While this does not provide a complete solution to the need for income cross-subsidies, this simple change would make a very large difference in the affordability of medical schemes for lower income workers.
The June 2009 NHI proposal from the ANC task team commented as follows on this subsidy: “This tax policy has major flaws. Firstly it is inconsistent with the principles of access, efficiencies and equity. The current tax expenditure subsidy on medical schemes’ deduction has not contributed to increased access by low income earners in medical scheme membership nor improved the rising costs of the industry. Those in the high income tax brackets continue to benefit more from the subsidy than the middle and low income groups. Furthermore, the workers, including the informal workers, not covered by medical schemes, do not benefit from the tax subsidy at all. Secondly, even when low income earners get tax subsidy, they would not be able to afford adequate coverage, leaving them with modest benefits and high cost sharing that will often make health care unaffordable.”
“Additional funding for the NHI system will include the elimination of the current tax-deductions for medical scheme contributions and channelling these funds to the NHI Fund to provide additional funds into the NHI system”.
Despite 15 years of commissions and reports all arguing for the abolition of the tax break for medical scheme membership, this incentive to join the private sector has been left in place each year. It is incomprehensible to many researchers that this adverse incentive should be allowed to continue. The proposal for a per capita subsidy would mean that every citizen would receive the same amount of subsidy for healthcare: in 2008 this would have been R1,900 pbpa which is the amount spent on those using government primary care and hospital services.
The tax threshold is the level at which people begin to pay income tax. This is at R54,200 per annum or R4,517 per month for those under age 65 in the tax year 2009/10. For those older than 65, the tax threshold is higher at R84,200 per annum or R7,017 per month.
|
