As announced in the 2018/2019 budget tabled in Parliament on 21 February, Value Added Tax (VAT) was increased from 14% to 15% on 1 April 2018. This increase forms part of government’s efforts to narrow the budget deficit and stabilise debt.
In light of this recent occurrence, it is important to consider the expected impact of the VAT increase on medical scheme members as well as the implications for the industry at large.
Although medical scheme contributions do not include VAT (i.e. the increase will not affect member contributions directly) payments to providers do include VAT. Medical schemes are therefore VAT payers but are not VAT recipients, which implies that they are unable to offset VAT paid by equally increasing VAT on contributions. Medical scheme members are thus likely to eventually experience an indirect impact on contributions; the increased expenditure by medical schemes as paid to providers will require a commensurate increase in contributions to ensure that schemes’ costs are adequately covered.
The increase in contributions will cover the additional amounts paid to service providers such as doctors, hospitals and pharmacies; as well as the increase in various components of non-healthcare expenditure such as administration expenses, broker fees and audit fees – all of which are levied with VAT. The financial impact of the VAT increase will also extend to medical savings accounts (MSA) and out-of-pocket expenditure – members are now likely to deplete their MSA balances more quickly due to increased provider costs
As a result, the full burden of these cost increases will ultimately be passed onto medical scheme members and are likely to impact the affordability of private health cover over time. We can expect to see a continued trend in members buying down to lower, less comprehensive plans which offer more affordable cover. This, in turn, could result in knock-on effects with regard to benefit option and medical scheme sustainability and could ultimately put the private healthcare sector under significant strain.
Thus, although medical scheme members may feel the initial pinch, they will likely not be the only stakeholders to suffer in the long-run. We, then, need to assess the extent to which universal health coverage is in fact being prioritised.
What are your thoughts?