Economic Consultant at Carpe Diem Research Services cc, Elize Kruger, breaks down the recent 2018 Budget Speech and explains what it means for the South African health sector. This article was commissioned by MediSwitch, a leader in the transmission of electronic healthcare transactions.
Finance Minister Malusi Gigaba delivered the 2018 Budget Speech on Wednesday, February 21, amid ongoing pressures from international credit rating agencies to stem the tide of rising government debt in the face of falling tax revenues, poorly performing State-Owned Enterprises (SOEs) and mediocre economic growth. The combination of notable tax increases, which will impact on each sphere of the economy, and significant expenditure reductions over the medium term have underpinned a stabilisation in the budget deficit as well as government debt levels over the next few fiscal years. This was a much-needed development and should be seen as the first step in the long road to return South Africa’s fiscal position to a healthy state. The content of the budget should also be viewed favourably by ratings agencies and as such there is a growing probability that Moody’s Investors Service will not downgrade South Africa’s debt to sub-investment grade at its upcoming credit rating review.
Health still a top priority for government
Expenditure on health remains a key priority for government, with R205.4bn to be spent in 2018/19, an allocation projected to rise by an average of 7.8% per year in the medium term. This makes health expenditure the third biggest item in terms of consolidated state expenditure (after education and social development), with 12.3% of total expenditure allocated to health.
The R205.4bn allocation is split between the following focus areas: district health services (R90.2bn), central hospital services (R38.6bn), provincial hospital services (R34.3bn), other health services (R33.8bn) and facilities management & maintenance (R8.5bn). Over the Medium-Term Expenditure Framework (MTEF) period (next three fiscal years), the department plans to focus on implementing the second phase of National Health Insurance (NHI), expanding treatment and prevention programmes for HIV, AIDS and TB, revitalising public healthcare facilities and ensuring accessible specialised tertiary health services.
Government reiterated its commitment to NHI with an additional R4.2bn being allocated to the programme. In his address to Parliament, Gigaba said that government has continued progressively on the path towards NHI. “SA’s social protection systems continue to protect the poorest of the poor and most vulnerable”.
The aim of NHI is to fundamentally reform how healthcare in South Africa is financed in order to increase access to and the quality of healthcare services. In this regard, over the MTEF period, the department intends to develop a NHI fund and related management structures, and expand access to the initial set of the priority services of NHI. For this purpose, additional amounts of R700m in 2018/19, R1.4b in 2019/20 and R2.1bn in 2020/21 were allocated mainly to NHI, Health Planning and Systems Enablement programme, financed through downward adjustments of the medical tax credit.
Accordingly, NHI, Health Planning and Systems Enablement programme’s total budget is expected to increase at an average annual rate of 49.9% over the medium term, from R914.7m in 2017/18 to R3.1bn in 2020/21.
The patient after Budget 2018
The public patient’s expectations relating to quality medical treatment in the upcoming fiscal year should be very similar to the previous year, as government has not embarked on doing things notably different. The additional money allocated to NHI will initially only cover initiatives such as school health programmes and chronic medicine dispensing.
A private patient, however, could feel somewhat worse off after the announcements in the National Budget, particularly relating to higher tax burden that will chip away at its disposable income, while there is also a change to the treatment of the medical aid tax credits.
With revenue falling short by a notable R48.2bn in 2017/18, government took the bold decision to hike the VAT rate by one percentage point, the first change since 1993, effective 1 April 2018. That would render the fiscus income of R22.9bn in 2018/19, the biggest chunk of the additional tax revenue of R36bn that was budgeted for. Government acknowledged that the negative impact on economic growth and investment would have been more severe if they opted to raise the bulk of the needed income by hiking the personal income tax rates even more. However, government still plans to raise R6.8bn from personal income tax in 2018/19 as they have not compensated the tax payer for bracket creep i.e. the phenomenon that an increase in remuneration could push you into a higher tax bracket, but given that the tax scales have not been adjusted to fully compensate for inflation, you end up paying higher tax and your net situation in take-home pay is less. In addition to higher fuel levy, higher customs and excise duties and the new sugar tax, the patient’s overall tax burden has increased, with the resultant negative impact on disposable income and consumer spending, and potentially also on the affordability of medical aid cover.
Relating to medical aid tax credits, Treasury indicated that the caps on these tax credits will increase at below inflation rates for the next three years. The cap will rise by 2% in 2018/19, significantly below Treasury’s forecasts for consumer price inflation of 5.3%. The medical tax credit will increase from R303 per month to R310 per month for the first two beneficiaries and from R204 to R209 per month for the remaining beneficiaries. However, the adjustment is marginal and unlikely to force households to drop their medical scheme cover. However, this is an area to watch out for in future, as major changes to tax credits could have a bearing on future medical aid affordability.
The doctor’s practice after Budget 2018
With the patient under strain due to the higher tax burden, medical practices will experience this reality in the form of higher operational costs (fuel cost, higher prices for consumables that are subject to VAT), potentially rising bad debt and higher wage demands from employees.
MediSwitch believes there are a number of actions that healthcare professionals can take to mitigate the impact of the higher tax burden on their practices. Checking a patient’s membership status as well as available benefits before rendering treatment can go a long way in avoiding bad debt. It also allows for patients to pay any outstanding amount before they leave the practice. In addition, following up on rejected claims as soon as possible ensures that the practices’ cash flow is not negatively impacted by stale claims. Furthermore, well-trained practice staff will result in a productive practice, ensuring sustainability now and into the future.