The NHI’s biggest flaw

The National Health Insurance (NHI) plan is South Africa’s version of universal healthcare – where resources are pooled to provide health services for everyone.

The scheme has been widely criticised by stakeholders in the country’s healthcare sector, but despite this, the government is adamant that the universal healthcare plan will be realised.

Health minister, Aaron Motsoaledi this week said that the NHI will be implemented by the next administration, indicating a clear plan for the scheme to be taken forward post the 2019 election.

According to Free Market Foundation researcher and data scientist, Mpiyakhe Dhlamini, apart from the many flaws in the manner in which it is being implemented, the most serious flaw is that the scheme is going to be prohibitively expensive – and will be most-used by those who are not paying for it.

“Scant attention has been paid in the South African public discourse to the structure of the proposed system and the problems inherent therein,” he said.

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.

The scheme has been painted by the health department to be a subsidy system – with the rich subsidising the poor, the healthy subsidising the sick and the young subsidising the old.

However, because of the socio-economic make-up of South Africa – where a vast minority pay almost all of the taxes – the scheme will end up doing more harm than good.

This is because the people who will make the most use of the system are not the ones paying for it, and thus have no incentive to balance the demand on the system.

Dhlamini pointed to the UK’s NHS as an example, where increased demand for services in the NHS did not result in increased supply of the service because the country’s 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 led to a deterioration in the quality of service offered by the UK’s NHS, he said.

However, in South Africa, the large majority of the country’s voters are not taxpayers.

In South Africa, the bulk of taxes raised by the 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.

VAT affects all voters – while 80% of PIT is raised from less than 2 million South Africans out of almost 27 million registered voters.

“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,” Dhlamini said.

“In other words, the voters will have an incentive to impose more taxes on the small population paying taxes, to fund greater levels of service – especially with regard to the NHI services that have the greatest elasticity of demand.”

Dhlamini said that taxpayers will, in turn, have a rational reaction to this scenario, that being to look for a way to reduce this burden – like packing up and leaving the country altogether.

“(This) 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,” he said.

“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.”

Read: How the NHI will change your medical aid contributions

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The NHI’s biggest flaw