Plan to cut tax credits could see poorest medical aid holders lose out

Johannesburg - Removing tax credits for medical schemes will make them unaffordable to 22% of current scheme holders, affecting poorer members most.

This is according to research by economics consultancy Econex, which looked at the impact of removing tax credits to medical schemes and then reallocating them to funding National Health Insurance (NHI), suggested by the 2017 White Paper.

The tax credits are paid to principal members of medical schemes to “reimburse” them for making use of private healthcare. During 2014/15 the amount of tax credits paid to these principal members was about R18.5bn.

During 2015/16 the total annual tax rebate paid to a principal member without dependents came to R3 240. A rebate of R12 966 was paid to a principal member with as many as four dependants.

Econex focused specifically on how the removal of the medical scheme tax credits would make medical scheme membership unaffordable, if the affordability threshold is 12.85% of income.

“We find that the removal of medical scheme tax credits will therefore affect poorer medical scheme beneficiaries disproportionately,” said Dr Paula Armstrong. These tax credits contribute to the affordability of medical scheme membership, particularly among the poorer beneficiary income groups. Tax credits effectively lower medical scheme contributions.

“In total, 21.86% of medical scheme beneficiaries will move above the affordability threshold with the removal of tax credits.” This means 1.9 million beneficiaries won't be able to afford medical scheme contributions.

• READ: NHI and your medical scheme: as clear as mud

The research was based on the Income and Expenditure Survey of 2010/2011, by Statistics South Africa. Econex observed private expenditure on medical scheme contributions, among other things, to calculate the overall spending on medical scheme contributions and the portions paid by individuals.

Econex calculated the tax rebate payable at a household level using information from the South African Revenue Service, dividing medical scheme beneficiaries into different quintiles on the basis of household income. It then measured the proportion of household income allocated to medical schemes against an affordability threshold.

Findings

For the poorest 20% of medical scheme members, tax credit reduces monthly contributions from R820.97 to R583.66. This reduces the proportion of household income allocated to medical aids from 35% to 22.04%.

For the wealthiest 20% of medical scheme members, the tax credit reduces the monthly contributions from R1 953.35 to R1 720.39. This reduces the proportion of household income from 6.29% to 5.50%.

For the poorest 20% of beneficiaries, the tax credit reduces the cost of medical scheme expenditure on average by more than 40%. The cost reduction is an average of 13.54% for the wealthiest beneficiaries.

Almost half (49.07%) of the poorest beneficiaries will move above the affordability threshold, indicating that the poorer medical scheme beneficiaries are impacted the most by the removal of tax credits.

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