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Tax increases imminent to fund the NHI shortfall

2017/18 South African National Budget Expectations

The highly anticipated National Health Insurance (NHI) White Paper, published in December 2015, proposed that the Minister of Finance increase payroll and/or personal income tax by 0.5% for the 2016/2017 financial year to raise revenue for the ambitious NHI implementation plan in South Africa, South African government, tax increases, prescribed minimum benefits, medical schemes, public healthcare, healthcare sector

The Budget Speech in February 2016 did not introduce the suggested tax increases. This has created a potential setback for the funding build-up towards the country’s universal healthcare coverage goal. A tax increase of 0.5% therefore seems imminent – if not in the upcoming budget speech, then certainly in the near future.

The White Paper proposes an NHI system that entitles all South African citizens to the same defined package of healthcare benefits. Coverage is to be provided irrespective of socioeconomic status with priority given to those who need it the most. The benefit package, although not yet clearly defined, is described as comprehensive. It would grant access to primary health care services, hospital and specialised services, and emergency medical services. The implementation plan for this new health system consists of three phases over 14 years. Phase one kicked off in 2012 with a focus on strengthening the existing health system by 2017.

The White Paper’s funding schedule proposes various scenarios to raise revenue from different tax sources over time, including payroll tax, personal income tax, and value-added tax. There are two scenarios requiring a tax increase in the 2017/2018 financial year: one scenario requires a simultaneous increase of 0.5% in payroll tax and 0.5% in value-added tax, while the alternative scenario requires a 1% surcharge on personal income tax. In addition, as government has fallen behind on funding, additional tax increases may be needed in order to maintain timelines.

So why didn’t the Finance Minister implement proposed tax increases last year? Firstly, 2016 was an election year, and followed closely on the 2015 Fees Must Fall protests. Tax increases could well have been delayed to avoid losing favour with the electorate. Secondly, at the time of the last Budget speech, the White Paper was still subject to scrutiny, with extensive additional work needed on the financing of the NHI. This second point - which essentially comes down to uncertainty around the implementation and funding of NHI - may well apply again this year.

In September 2016, the Davis Tax Committee (DTC), established by the Minister of Finance in 2013, invited public comment by mid-October 2016 on the funding of NHI as proposed in the White Paper. The submissions included concerns about the cost estimates used being outdated, and the assumptions used to calculate them (for example, fraud, number of participating facilities, medical inflation rate etc.) lacking credibility. In many instances, rather than directly comment on the proposed NHI system, the commentary provided alternative solutions to achieving universal healthcare. These included deregulating the industry, establishing a zero VAT rate on all legal medicines, removing prescribed minimum benefits provisions, allowing private training for doctors and nurses, and introducing mandatory low income medical schemes for all employees. It remains to be seen how government will react, if at all, to these comments.

While the financing component of NHI is still up for debate, the service delivery component is already being tested and the results are concerning. The first phase of NHI kicked off in 2012 when government started a pilot programme at 11 sites as a feasibility assessment. To date the pilot projects revealed, as noted by the Minister of Health, serious staff shortages in the public healthcare sector (including audiologists, speech therapists and hygienists). Furthermore, according to the Office of Health Standards Compliance (OHSC), hospitals and clinics in the pilot programme are not improving faster than those in the rest of the country. Only 89 facilities out of 1 427 that received mock inspections scored a pass mark of 70% or more, falling short on matters ranging from the availability of medicines to infection control. The Health Minister justified these results as the OHSC being on a learning curve. This, after the Treasury initially allocated a grant of R1 billion for the pilot programme, but consequently reduced funding to approximately R200 million due to slow spending by the provinces. While 73% of the NHI grant has been depleted, only 6% of the facilities have attained sufficient standards after four years.
The NHI White Paper has set out a seemingly ambitious plan to provide universal healthcare coverage to South Africans. Its cost forecast is potentially underestimated (as raised through public comment) while service delivery expectations appear optimistic (considering the pilot district results). This suggests that the National Budget will require significantly higher tax revenue to implement the proposed new health system. An increased burden on tax payers is thus on the horizon, even more so now that Treasury has fallen behind on the proposed funding schedule in the last financial year.

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