The NHI: Analysis from a public choice perspective

The NHI is set to be South Africa’s version of universal healthcare where resources are pooled in order to provide health services for everyone. Apart from the many flaws in the manner in which it is being implemented, a most serious flaw is that it is going to be prohibitively expensive. Scant attention has been paid in the South African public discourse to the structure of the proposed system and the problems inherent therein. 

The NHI is a single-payer system where the government would be the sole purchaser of health services on behalf of all South Africans. The government would be responsible for certifying healthcare providers from both public and private providers. It is also envisioned that supply and demand-side measures would be implemented, presumably, to contain the economic effects that will arise from having zero prices on the demand side of the equation.

In the absence of market prices, how likely are these “measures” to achieve their desired effects considering the expected behaviour of individuals on the demand side? And, how does this expected behaviour interact with the expected behaviour of South African voters in their role as provider of healthcare services by determining taxation through the political process?

Public choice theory, a micro-economic analysis of actors in their public as well as private market roles, allows us the tools to make these kinds of analyses. Even a relatively simple (minimal assumptions) micro-economic model of behaviour applied to voters and market participants allows us to arrive at conclusions that accord closely with reality. That is because we do not limit ourselves to examining only economic market participants but also political market participants, who are often the same people.

In South Africa the bulk of taxes raised by government are in the form of PIT (Personal Income Taxes) and in the 2017/18 tax year 1.9 million South Africans contributed 80% of the revenue. Over the years PIT has grown from roughly making up the same proportion of revenue as VAT to becoming the single largest source of revenue. The reasons why are not difficult to see: VAT affects all voters, 80% of PIT is raised from less than 2 million South Africans out of almost 27 million registered voters.

This illustrates an important point with regard to South Africans as demanders of NHI services: At zero prices, the services offered by the NHI with the greatest elasticity of demand are going to experience the greatest demand from the public. In a country like the UK, one of the founders of public choice theory, James Buchanan, concluded that this increased demand for services in the NHS did not result in increased supply of the service because voters in their role as suppliers of the service through taxation had an incentive to keep taxes on themselves as low as possible. This mismatch lead to a deterioration in the quality of service offered by the UK’s NHS.

The situation in South Africa is quite different given the fact that there is such a mismatch between the population of voters and the population of individuals paying taxes. This means that the marginal cost to the taxpayer of funding the NHI is likely to significantly outweigh the marginal utility derived from using the NHI. Those people paying taxes then have one of two options: they can either leave the country or stay and figure out a way of reducing their tax burdens. In other words, the voters will have an incentive to impose more and more taxes on the small population paying taxes in order to fund greater and greater levels of service, especially with regard to the NHI services that have the greatest elasticity of demand. The taxpayers will get to the point where the benefit of the NHI is outweighed by the cost because of this, and they will act rationally in an effort to reduce this burden.

The demand measures, e.g. gate-keeping, proposed by the health minister in the NHI policy are not worth the paper they are written on. As long as the tax system is structured as it is now, some political competitor to the government of the day will come along and propose reducing or eliminating any demand-limitation measures.

The point here is that there can be no social-solidarity without shared pain in the form of the tax burden. South Africa cannot have a system similar to the British NHS given the socio-economic state of the country where a tiny minority pay most of the taxes. Given that we are a democracy, such a situation leaves us vulnerable to the possibility of taxing the golden goose to death because any welfare measure is under the control of people who do not have to pay for it. With everyone acting rationally in the private as well as public arenas, the introduction of a system like the NHI will destroy the South African economy.

Mpiyakhe Dhlamini is a data science researcher at the Free Market Foundation

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