Although an employer may be forgiven for believing that the NHI is a cheap and simple answer to the problem of securing their employees’ access to health care services, the situation is not so simple. There are some ramifications in the draft legislation that could frustrate many employers.
The NHI Bill makes no mention of how the proposed national insurance scheme will be funded. This is not a decision for the Minister of Health, whose portfolio includes the NHI Bill. It is up to the finance minister and the National Treasury to make the decision. This is due to the Constitution’s need that the Minister of Finance prepare and introduce a Money Bill in Parliament before NHI can be funded. There has yet to be a Money Bill, although Section 49 of the NHI Bill states that the Fund is entitled to money appropriated annually by Parliament. This money will come not just from general taxation, in addition to from “payroll tax (employer and employee)” and “a personal income tax surcharge.”
A payroll tax must not be confused with personal income tax on employees that an employer deducts from their earnings and pays directly to SARS. It is over and above personal income tax. Theoretically a payroll tax is effectively shared between an employee and an employer, but not necessarily in equal portions.
Payroll taxes can significantly increase labor costs to employers, exacerbate unemployment and shift employment from the formal to the informal sector. Employers who currently subsidise medical aid membership for their employees will not necessarily experience any savings as a result of NHI. The government understands many employers subsidise employees’ medical scheme membership and it is likely that this is the one of the reasons why a payroll tax is mentioned in the Bill. There is no doubt that the NHI Bill intends to channel private funding for medical scheme benefits into public funding for NHI. This is evident from the provisions in the Bill on medical schemes that significantly restrict the nature of the health care cover they will ultimately be able to offer.
Employers could end up paying more in taxes than what they currently pay in medical aid subsidies since a payroll tax affects both the employer and the employee. Payroll taxes can be complicated and may increase annually as NHI gains momentum.
In a 2001 Working Paper1 produced by Stanford University, financially supported by the World Bank, the following points were made –
1. Payroll taxes in the form of mandatory contributions by employers, are used in most developed and developing countries to finance the provision of pensions, healthcare benefits for disability and maternity and compensation for work injuries for employees.
2. In Europe payroll taxes and other mandated contributions are as high as 30% of the payroll in countries such as Sweden, Belgium, France and Italy. In the less regulated British and North American labour markets these contributions are between 15% and 20%.
3. The Paper specifically studied the results of increased payroll taxes in Colombia, a developing country like South Africa. It noted that Colombia experienced a sharp rise in unemployment starting in 1996 especially for unskilled workers.
4. The paper used a panel of manufacturing plants from Columbia to analyse the effects of the sharp rise in payroll tax rates following the Social Security Reform (SSR) of 1993. In a two-year period, the SSR increased payroll taxes for pensions and health by 10.5%. This constituted a large temporal change in payroll taxes, much larger than what is usually observed in developed countries.
5. The authors estimated that only about a fifth of the rise in payroll taxes was passed on to workers as lower wages. This result showed that a 10% increase in payroll tax rates reduced employment by 4.9% due to increased labor costs.
6. The downward wage rigidity generated by a binding minimum wage precluded the manufacturing plants from passing the higher taxes on to workers in the form of lower wages.
7. Given that only 20% of taxation costs were passed onto workers as lower wages, the authors said it was not surprising that they found a large negative effect of payroll taxes on employment.
8. In particular they found that a 10% increase in payroll taxes reduced employment between 4.2% and 4.9%. They found greater negative effects of payroll taxes employment for production than for non-production workers. This was consistent with soaring unemployment, especially among the unskilled who are subject to minimum wage.
Some 8 years later, the Colombian government was trying to reduce payroll taxes to get more people into formal employment to increase the tax base for social security benefits. In a 2014 article in the Journal of Labour and Development2, the authors studied the effect of payroll taxes on employment and wages in the presence of high labor informality. They stated that informality is a widespread phenomenon, especially in developing countries and may be explained by many factors.
However, in several studies, the burden of taxes and social insurance contributions are typically identified as one of the most important factors for explaining informality. Based on this finding, governments are sometimes motivated to decrease taxes, particularly payroll taxes, to promote labour formality and thus provide social insurance services for a larger share of the population. This may be an especially demanding issue some regions in the world.
Another study cited by the same authors estimated that approximately 56% of wage earners in Latin America are informal in the sense that they do not pay labour taxes in exchange for social insurance services such as health and pensions.
They state that their results suggest that the tax reform would have a modest effect on employment but a significant reallocation of labour across occupations and formality status. In particular, they said that as a result of the reform, total employment would increase between 0.3 and 0.5%. Correspondingly, formal employment would rise between 3.4 and 3.7% and informal employment would decrease between 2.9 and 3.4%.
The authors also said that the tax reform would bring an increase in the net wage for formal workers of between 4.8 and 4.9%. This last result suggested that there is a large pass-through effect in the Colombian labour market, so that the fall in payroll taxes may translate into higher wages for formal workers.
They state that if the Colombian fiscal reform was aimed at increasing labour formality it was important to guarantee that the scheme of taxes and transfers in the near future would be dynamically consistent. Otherwise a fiscal reform that is accompanied by an increase in transfers to informal workers in the medium term might end up taking the economy back to its pre-reform levels of informality.
If a payroll tax is combined with a surcharge on personal income tax, employees could end up paying far more for NHI benefits than they do currently for employer subsidised medical scheme contributions.
For the vast majority of employees a reduction in their disposable income in the current environment could force more into poverty and significantly increase labour pressure on employers to provide wage and salary increases. Labour driven industrial action is costly to employers and comes with significant disruptions in production leading to lower profits.
A 2021 article by Fedderke3 notes that the South African labor market has been characterised by high and persistent levels of unemployment, and a poor capacity to create jobs. Pricing power in output markets, as well as labour supply and demand side rigidities are all found to have contributed, resulting in excessive increases in real wage costs which under conditions of relatively low economic growth, has produced a stagnant labour market. Policy requirements are the pursuit of stronger economic growth and reductions in real labour costs.
Section 49 of the Bill does not mention VAT increases but the Minister of Finance does not need the permission of the NHI Bill to increase VAT. If it is decided that VAT increases may partially fund NHI, employers too will be paying that price.
The NHI Bill, if passed as it is currently worded, could preclude the possibility of securing health care services from private providers for employees at all levels of the organisation. The National Health Bill only provides in section 57(2)(b) for the “selective” contracting of health care services from private providers.
It is therefore highly likely that even if private health care providers are willing to contract with the NHI Fund, which is not guaranteed, not all of them will be contracted to the Fund. In practical terms this means that access to private health care providers of any kind could be considerably restricted and the Fund may attempt to channel more patients into the public health sector.
Various provisions of the NHI Bill actively encourage out-of-pocket expenditure on health care services by restricting access to private funding for those services in the form of medical schemes.
Some of these provisions are :
- mandatory referral pathway requirements,
- limited availability of medicines due to the existence of a mandatory Formulary based on the government’s Essential Medicines List,
- delays in access to care due to selective contracting of private healthcare providers,
- access to certain health care services being potentially restricted entirely to public health sector establishments such as central government hospitals; and
- a legal prohibition on medical schemes funding any pregnancy related health care services.
- Changes to COIDA to channel occupational related healthcare cost to the NHI. Any delay in accessing care may affect time to recuperate and work place productivity.
The implications described above highlight some potential challenges and concerns that employers may face with the implementation of national health insurance (NHI) and changes to medical scheme cover. These implications include:
Limited access to services: If private providers, such as GPs, physiotherapists, psychologists, and dentists, decide to become cash-only practices due to the absence of comprehensive medical scheme cover, it could result in reduced access to these services for many employees. This could impact their ability to receive necessary healthcare and may lead to increased healthcare disparities.
Capacity issues for private hospitals: Private hospitals that secure contracts with the NHI Fund may face challenges in accommodating a larger number of patients than they can handle. This can lead to increased waiting times and delays in receiving necessary medical treatment, which can negatively impact the productivity and well-being of employees.
Alternative private financing: Private hospitals may explore alternative methods of private financing for healthcare if medical schemes are prohibited from covering costs. These alternative methods are likely to be for-profit and may have higher costs compared to medical scheme cover. This could make healthcare services unaffordable for many employees, further limiting their access to quality care.
Impact on employment benefits: Medical aid membership is often considered an important employment benefit, particularly when it is subsidised by the employer. The ability to access private healthcare services quickly and efficiently is valued by employees, as it provides a certain level of quality care and helps them avoid the challenges associated with the public health sector, such as long waiting times and limited resources.
Overall, these implications highlight the potential trade-offs and challenges that employers and employees may face with the implementation of NHI and changes to medical scheme cover. It emphasises the importance of considering the potential impact on access to healthcare services and the affordability of quality care for employees.