Improving Equity in the Subsidies for Healthcare in South Africa Prof Heather McLeod University of Cape Town University of Stellenbosch South Africa

Public-Private Coverage Source: McIntyre D., van den Heever A. Social or National Health Insurance. In: Harrison S., Bhana R., Ntuli A., editors. South African Health Review Durban: Health Systems Trust; URL:

Two Paths to Universal Coverage 1994 to 2007 Gradual, begin with highest paid workers and their families. Subsidies for workers earning below tax threshold. Medical Schemes are vehicles for SHI, buy from private and (increasingly) public providers. Open enrolment, minimum benefits (PMBs), community- rating, income cross-subsidies, risk cross-subsidies, mandatory contribution. Competitive purchasers, with Risk Equalisation Fund. “Post-Polokwane” Dec 2007 Immediate: “within 5 years” Tax and progressive social security contribution. Central buyer, with public and private providers. Role for medical schemes undefined – perhaps top-up only? Package not yet defined. Elections in Through SHI to NHI Direct to NHI

Phased Coverage for NHI Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

Private Medical Schemes Employer Member Direct community-rated contribution for total package of benefits Government Public sector facilities Treasury allocation of funds to provinces Tax Subsidy in the form of a tax break for medical scheme membership Current Situation

Risk-adjusted transfers for minimum benefits Risk Equalisation Fund Private Medical Schemes Employer Member Direct community-rated contribution for packages above minimum benefits Government Remove existing tax subsidy Direct subsidy per person (total population) Income-based contribution for private minimum benefits less direct subsidy Public sector facilities Risk-adjusted transfers Public sector facilities Remove existing provincial allocation Tax

Income cross- subsidisation Risk cross-subsidisation 0%100% 0% 100% 1 Pre Medical Schemes Act (2000) Open enrolment PMBs Community-rating 3 Extension of PMBs (2004) Removal of tax subsidy Re-allocation of tax subsidy on an equal per capita basis at value of PMBs 8 Health tax introduced to fund value of comprehensive PMBs Ultimate policy objective Possible trajectory combining both risk- and income- cross- subsidisation Risk Equalisation Fund Comprehensive PMBs implemented Policy Objective and Trajectory Source: Ministerial Task Team on SHI July 2005

Illustration of Affordability Family of four: two adults and two children. Earning an illustrative level of income. Eight income groups. Purchasing typical health insurance products in the market in One person earning and paying income tax. Using 2008/9 income tax tables, revised to Social security contribution for health of 4.1% of income. Covers Prescribed Minimum Benefits. Other scenarios include contribution of 10.3% of income to cover expanded benefit package (not illustrated here). Flexibility to look at other family structures (important for tax and subsidy incidence). Flexibility for different year for tax treatment.

Current Affordability Problems Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming Lowest income groups unlikely to have VHI and if so are probably fully subsidised by employer. At high income groups, 70-80% of people have voluntarily chosen to have cover.

Current Affordability Problems Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming Comprehensive package unaffordable except for highest income. People self- select to packages that are more affordable, largely because of reduced benefits. Demographic effect as well: younger and healthier in low cost packages.

Current Tax Subsidies for Health Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming Tax break has no impact on people earning below tax threshold. Has biggest impact for highest income group.

Remove Tax Break and Replace with Per Capita Subsidy Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming This has a dramatic impact for those earning below the tax threshold. The proportion of income may still be too high to be affordable but with some help from employer cover is now within reach.

Per Capita Subsidy, REF and Income Cross-Subsidy Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming Affordability can be improved for lower income groups by implementing income cross-subsidy and Risk Equalisation Fund together.

Sequencing of Reform Critical Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming This methodology can be used to explore the effects of other sequences of reform. Some sequences make affordability substantially worse in the interim which would destabilize VHI. Sequences with larger minimum benefit packages not shown.

The Sequential Implementation of Complex Reforms From an implementation point of view, there are considerable risks in implementing all the steps towards a system of mandatory membership at the same time. If all steps are not introduced at the same time, the order in which the steps are introduced will have a different impact on different stakeholders. In order to retain stability within the current system as well as to attract new members into the system it would be essential to introduce income cross-subsidies simultaneously with risk equalisation and before other reforms to the benefit package. If not it will decrease the affordability of private health insurance for many members, thereby forcing them to opt out of the system. At worst, risk equalisation needs to be introduced after the per capita subsidy and before full income cross-subsidies, but prefer risk equalisation together with full income cross-subsidy. Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

Preferred Sequential Implementation The sequence that will cause the least instability and seems most viable in terms of the impact on workers is as follows: Already in place: open enrolment, community rating, minimum benefits. Remove tax subsidy and replace with a per capita subsidy; Introduce the Risk Equalisation Fund to operate between options; Simultaneously introduce an income cross-subsidy; Introduce mandatory membership for all earning any income (very lowest income need some form of wage subsidy or subsidy of social security contributions if these are a flat percent of income); Deal with option restructuring issues to improve community-rating at scheme level and enlarging the package of minimum benefits (suitable trajectory for these reforms still requires further analysis). Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

Conclusion on Sequential Implementation The difficulties raised by the sequential implementation of complex reforms are significant in the transition from a voluntary to a mandatory health insurance system. Risk equalization is a critical institutional component in moving towards a system of social or national health insurance in competitive markets, but the sequence of its implementation needs to be carefully considered. Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

Professor Heather McLeod