Income, Outgo, and the NHI

What about the NHI sounds like a bad idea? Free, universal, comprehensive medical care – it’s a great ideal.

What about our current healthcare setup sounds good? A small proportion of the population have access to excellent healthcare, but the vast majority have “access” to public health comprising long queues (often after long walks) to understaffed, understocked hospitals with demotivated doctors and hospital managers who combine the worst elements of overworked and disinterested. Clearly, not much. Did I mention that the tax structures around medical scheme contributions have benefitted the wealthy over the poor?

If the obvious solution seems to be solving this problem by changing from our current system to the new proposed NHI, I have some bad news. The problem identified above isn’t a healthcare problem. At least it’s not only a healthcare problem.

The problem is both a healthcare problem and a GDP per capita problem. On the one hand we have mismanaged health resources with some odd incentives, but on the other we have an economy which is too small to support the sort of healthcare expenditure we might dream of for all our citizens.

We have to consider state income and outgo before we can make decisions around the NHI.

Income for the state is our tax revenues. (I’m not including borrowings here as income since this is a capital transfer that must be repaid.)

Outgo for the state is everything the state provides (plus some required management and administration costs and, unfortunately, some wastage and fraud.)

In the long-run, income must balance outgo. We have to pay taxes for the benefits we receive. We can design whatever NHI (or education plan) we desire, but the income has to come from somewhere.

The only remaining decision is how to distribute the tax burden.

  • What share of the income (taxes) must come from corporations versus individuals?
  • How much should come from sales taxes / consumption taxes (such as VAT), how much come from income taxes (SITE and PAYE) and how much must come from wealth taxes (e.g. transfer taxes and estate taxes)?
  • How much of these taxes should be born by everyone equally, and how much should the rich pay more to cover a share of those who are unable or for whom it would be an unfair burden to pay?

If we accept the premise that the very poor cannot pay any more in taxes, a decision to implement NHI is equally a decision to increase taxes and increase the taxes paid by the “relatively rich”.  Similarly, a decision to increase teacher’s salaries by 50% is also a decision to increase taxes and increase the “progressiveness” of the tax system. (The alternative is that some other state expenditure or outgo must be reduced.)

To be clear, I’m not saying that this is necessarily the wrong decision. It must be recognised that this is the decision. It must be recognised in the analysis of our healthcare problem that the reason we have unequal healthcare is because we have unequal incomes. Attempting to address the healthcare problems without recognising the more fundamental cause of unequal incomes (and what drives that) will create more long-term problems.

It’s telling that much of the analysis which lead to the original NHI proposals expressed emotional shock at the disproportionate expenditure on healthcare resources by a small proportion of the population, but didn’t state simply and boldly that this is a function of income inequality.

Increasing the tax burden on the economically productive members of society (especially without addressing the ability of the state to effectively and efficiently provide healthcare services) in an attempt to provide universal, comprehensive coverage over a short time-horizon without addressing the fundamental issues of economic growth, skills, technology, capital formation and employment will not work because the disincentives to be economically productive will increase enormously.

As a nation, we can’t afford to all drive Porsches. Any policy that tried to achieve this without enabling our citizens to be more productive and increase GDP per capita would fail too.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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