By Dr Paula Armstrong

The NHI White Paper published in June 2017 proposes that tax revenue currently spent on medical scheme beneficiaries in the form of medical scheme tax credits be redirected towards funding the NHI.[1] In 2014/15, the total amount paid to the principal members of medical schemes in the form of medical scheme tax credits totalled approximately R 18.5 billion.[2] The primary purpose for the tax credit is to “reimburse” taxpayers making use of the private healthcare sector. The credit is therefore only available to tax payers and represents a transfer from government to medical scheme members. We can think of it as a form of compensation for making use of private sector healthcare facilities and reducing the burden of healthcare delivery for the public sector. As such, it has a cost reducing role for medical scheme members.

Econex has analysed the extent to which removing medical scheme tax credits will impact on the affordability of medical scheme membership. Importantly, we consider the impact of removing the tax credit ceteris paribus; i.e. other things being equal, we consider only the impact of removing tax credits. We do not consider how medical scheme affordability will change with adjustments to risk pools such as mandatory membership, risk equalization or single benefit options. The methodology and results of the analysis are discussed in detail here. Relying on data from Statistics South Africa’s Income and Expenditure Survey of 2010/2011 (IES 2010/2011), we calculate the proportion of overall income allocated towards expenditure on medical scheme contributions. We calculate an affordability threshold of 12.85% of household income for medical scheme contributions. In other words, we assume that people will not spend more than 12.85% of their disposable income on medical scheme contributions. In order to assess the impact of the tax credit on medical scheme affordability, we calculate the proportion of beneficiaries across different parts of the income distribution that will face “unaffordable” medical scheme contributions should medical tax credits be removed. The results are shown in the figure below. Each income group comprises 20% of medical scheme beneficiaries ranked from poorest (beneficiary income group 1) to richest (beneficiary income group 5).

Figure 1: Proportion of beneficiaries moving above affordability threshold with removal of medical scheme tax credits

Source: IES 2010/2011 (Statistics SA); SARS (2017); Econex calculations.

Removing medical scheme tax credits will increase medical scheme contributions above the affordability threshold for almost half of beneficiaries in income group 1 (49.07%). In income groups 2, 3, 4, and 5, 21.51%, 14.29%, 9.43%, and 4.08% of beneficiaries’ contributions will increase above the affordability threshold should the tax credit be removed. This illustrates that the removal of medical scheme tax credits will affect poorer medical scheme beneficiaries disproportionately. In total, 21.86% (1.9 million in 2016) of medical scheme beneficiaries will move above the affordability threshold with the removal of tax credits.

The disproportionate effect on relatively poorer households will need to be considered when evaluating the rationale for removing medical scheme tax credits to help fund the NHI.

[1] Department of Health. 2017. National Health Insurance for South Africa: Towards universal health coverage. White paper. Par. 243, p 48.

[2] National Treasury. 2017. Budget Review 2017. Available: http://www.treasury.gov.za/documents/national%20budget/2017/review/FullBR.pdf

Author/s: Dr Paula Armstrong  

Nothing in this publication should be construed as advice from any employee of Econex and should be seen as general summaries of developments or principles of interest that may not apply to specific circumstances.