Some people are trying to make us believe that a tax deduction is the same as a subsidy and that is why scrapping tax deductions on medical aid contributions is one of the considerations for the proposed National Health Insurance (NHI) scheme.
A tax deduction or exemption in respect of medical expenses is a government decision to refrain from taking money in the form of tax from taxpayers who are paying their own medical expenses and generally not using publicly provided medical care. A medical expense tax deduction is therefore not a subsidy. Government cannot subsidise you with your own money. Unlike subsidies, tax exemptions are far less prone to political manipulation. Tax exemptions benefit the intended beneficiary directly by lowering their tax liability. Subsidies, however, can be used for political reasons and, usually, are channelled to special interest groups – after government has taken its cut for acting as intermediary. Taking one person’s money in order to pay for another person’s medical care is a subsidy.
Proposing to scrap tax exemptions is simply a straw man. The reality is that government is intent on getting more money out of taxpayers at the expense of the private medical care sector. Eliminating tax deductions related to medical care will drive up the cost of medical scheme contributions, making it unaffordable for new members to join and forcing those at the margin to drop out.
Most, if not all, developing countries face the challenge of having insufficient revenues to adequately provide for the health care needs and demands of their populations. Most spending on medical care in developing countries is derived from the private sector, and most of that is out-of-pocket. SA is no different to the typical developing country. According to Johan Biermann, in SA between 16% and 45% of medical care spending is out-of-pocket. However, SA does differ from the typical developing economy by having a strong system of formal medical insurance.
Given the amount of out-of-pocket expenditure on medical care in SA, one would imagine that a regular small fixed payment to a medical scheme would make intuitive sense, as opposed to the rare but devastating high out-of-pocket payments required when illness strikes. It would also make sense if private medical insurance coverage could be extended to a greater proportion of the population if affordable premiums were made available. Rather than forcing individuals to purchase nationalised cover, the government should allow the market to function efficiently. Tax deductions are one option. But, another, more effective one, would be to remove the statutory requirements that artificially inflate the cost of insurance. By reducing the overall cost of obtaining private medical insurance, the burden on an overstretched public medical care sector would be relieved, allowing government to focus on providing funding for the truly destitute.
If the government eliminated the statutory requirement that every medical scheme must provide a comprehensive package of minimum benefits, commonly referred to as Prescribed Minimum Benefits (PMBs), more individuals would enrol in private medical schemes. The PMB regulation forcing medical schemes to provide a comprehensive package of minimum benefits, attempts to stop risk selection through product design. Whereas, policies that predominantly cover accidental risks tend to appeal to younger people, and policies covering mainly chronic conditions tend to appeal to older people, the government’s list of PMBs applies to everyone, regardless of age, sex or health status or even whether or not they actually need the cover. And these minimum benefits raise the predicted costs of every option. People seeking affordable private medical coverage at the low end of the market are disappointed and those at the margins leave. PMBs prevent medical scheme actuaries from devising schemes to suit particular categories of members and circumstances, especially those that cater for low-income people.
To increase the number of beneficiaries and reduce the cost of medical scheme options, government needs to remove PMBs. Alternatively, it could allow certain schemes at the low end of the market to be exempted from PMBs or for medical scheme members to vote to opt out of the PMB requirement. This would give actuaries a chance to devise options that cater for low income individuals.
Rather than assuming responsibility for all medical care, which is not necessary or desirable, government should allow the private sector to operate more freely. If government enlisted the support and help of the private sector, removed barriers that prevent the market from functioning efficiently and contracted out those services that can be provided more efficiently and at lower cost by private providers, it would be able to concentrate its efforts and taxpayer resources on those who truly cannot afford medical care. And, wherever possible, it could also enlist the help of charities and philanthropists who are no burden on the country’s taxpayers and, when based in communities, have a very good idea of what services are needed.
Author: Jasson Urbach is a director of the Health Policy Unit (a division of the Free Market Foundation) and of Africa Fighting Malaria. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.
HPU Feature Article / 27 September 2010