Medical aid tax warning

Implementing the National Health Insurance (NHI) scheme will significantly affect medical aid tax credits, potentially increasing the tax burden for members and putting more pressure on the public health system. 

President Cyril Ramaphosa signed the NHI Bill into law last month, setting in motion the transformation of South Africa’s healthcare sector. 

The government’s scheme aims to achieve universal healthcare coverage by creating a state-run fund to pay for healthcare provision and banning the private sector from financing treatment covered under the plan. 

This will put immense financial strain on the government, which has failed to balance the budget since 2008. 

The only way such a scheme can be funded is through additional tax revenue, which will most likely come in various forms. 

The NHI is estimated to require at least R200 billion in additional funding annually. The Department of Health confirmed that tax increases and changes are on the cards. 

South Africa’s largest medical aid provider, Discovery, outlined three ways in which the NHI scheme could be funded –

• A 31% increase in personal income tax rates or
• A 6.5% increase in VAT or 
• A ten times increase in payroll tax

Discovery said none of these options is affordable or realistic. It said raising new revenues to supplement the government budget for healthcare presents material challenges.

This suggests that the rollout of the NHI will be slow unless there is a substantial improvement in the country’s economic prospects.

The government has long touted a plan to shift money contributed by individuals to private medical aid to the government to fund the NHI. 

The Department of Health claims that this would reduce the need for additional tax increases, as money that would have been contributed to private healthcare funders would just be redirected to the government. 

NHI Deputy Director-General Nicholas Crisp was clear in saying that the only way to do this is through taxes. 

“Whether that is through VAT or other taxes is a matter for the National Treasury and the Money Bill, which will come later,” he said. 

The first step towards this is reducing and potentially removing medical aid tax credits, which would free up money to fund the initial stages of the NHI and remove an incentive for South Africans to contribute to private medical aid. 

Crisp said this idea had been discussed for years in efforts to reduce inequality. It would effectively shift funds from wealthier individuals into the public system. 

“The challenges we have is that neither of these systems, the funding of these systems is efficient, it’s not effective, and we spend a lot of money considering the poor outcomes we get,” he said. 

Disastrous consequences looming

While this plan, in theory, seems to avoid the issue of the government potentially having to levy massive tax increases, it comes with its own problems. 

Following the signing of the NHI Act, Discovery warned that removing medical scheme tax credits would have disastrous consequences for healthcare in South Africa. 

This would negatively impact the ability of medical aid scheme members to afford private cover, reducing their access to quality healthcare. 

Furthermore, this would increase the burden on the already stretched public health system as more South Africans would turn to state hospitals because they could not afford the private alternatives. 

Discovery said this would have a particularly severe impact on low-income medical aid scheme members. 

Amendments to taxes in South Africa requires a Money Bill be passed by Parliament, which the ambit of the National Treasury. 

Discovery said this requires an analysis of the social and economic effects of such changes to the tax regime. 

The proposals in the NHI Act are factually inaccurate and do not appear to be consistent with these principles. 

This fundamental problem appears to be borne out in the actions of Finance Minister Enoch Godongwana, who has yet to reduce medical aid tax credits. 

“What we saw last year is the increase in tax credit to the private sector while the Finance Minister cut the budget in the public sector. That doesn’t make sense as a country to operate in that way,” Crisp complained.

At the presentation of the Act, the Minister of Health indicated that no tax changes are envisaged over the 3-year period of the current Medium Term Expenditure Framework.