National Health Insurance: The Way Forward for South Africa?

National Health Insurance: The Way Forward for South Africa?

By Jason Bell, Economics student, 8 November 2016,

South Africa has a long history of inequality, in both economic and socio-economic spheres. One of the country’s biggest challenges since the dawn of the democratic republic has been an effective healthcare system that is far-reaching and provides quality care to the sick. With the goal to provide everyone with an equal and fair opportunity to medical care, should they require it, there have been some attempts by the Apartheid regime government to provide health insurance on a national level. Dating back as far as 1944, when the Gluckman Commission proposed National Health Service (NHS) that would be fully funded through the use of taxpayer money. The proposed system did not garner strong support from the National Treasury as it felt it would further burden the already strained middle-income group (McIntyre & Van den Heever, 2007). It was not until the 1980s and more recently the 1990s that the question of whether South Africa can afford to fund a national health insurance program that covers all of its population, re-emerged.

The aim of this essay is to extensively look at the proposed National Health Insurance initiative set forth by the Government and see if the model that is being used is the correct one. As well as given the fiscal constraints that policy makers are confronted with, whether an alternate model may be more competent. I will then analyse international examples of national health insurance models that have been employed in other countries.

The Basic Idea of a National Health Insurance Program

In general, health financing models are required to meet three principles. First, it must raise enough revenue to provide vital services. Second, the model must efficiently manage the revenue to divide the health risks equally. Finally, the purchase of health services must be done a technically efficient manner.

According to the White Paper (2015) entitled National Health Insurance for South Africa: Towards Universal Health Coverage, the aim of the program is to create single publicly financed pool of funds to provide quality, affordable health services for all South Africans. The program aims to assist any citizen regardless of their socio-economic status. Manning et al. (1987) cite the Rand Health Insurance Experiment in that one of the many objectives that must be achieved is that the insurance needs to be “uniform across the various medical services.”

Carrin and James (2005) say that Social Health Insurance (SHI) must involve compulsory membership from the entire population. They say that in terms of an economy’s transition towards SHI, the crucial factors involve the level of income, the economy’s structure, the population’s socio-economic distribution, the ability of the country to effectively administer SHI, and the level of camaraderie within the society.

Stuckler et al. (2010) argues that the proposed adoption of a National Health Insurance program is primarily a political issue as opposed to a technical one.

The Welfare Economics of Health Insurance

When one wants to look at the simple idea of a market system with no health insurance present, assuming perfectly competitive markets for a certain standardised health service, one can think of a system such as the one below adapted from Reinhardt (2009),

In the above model, the market demand curve is equivalent to the marginal social value (MSV). On this curve it is assumed that each consumer purchases one unit of health care per period so therefore a single point on the market demand curve represents a particular consumer’s maximum price that they are willing to pay for that unit of health care. Similarly, the upward-sloping market supply curve is equivalent to the marginal social cost (MSC). It represents the provider’s minimum asking price per unit of health care, increasing as the quantity of health care units per period increases.

In equilibrium, the price and quantity that clear the market are P* and Q* respectively. The consumer surplus is defined as area A and likewise the producer surplus is the area of triangle B. the total social surplus that is present in this market is the sum of the areas of A and B, and maximising this total social surplus is called maximising the social welfare of this system.
If it is assumed that the government were to introduce a tax-funded, public-health insurance program we may encounter a model such as the one below,

The upward-sloping dashed line shows the number of units of health care at which the providers are willing to supply to the consumers, or patients, at the out-of-pocket price. This curve must not be seen as the new marginal social cost curve, but rather as the suppliers’ reaction curve to the out-of-pocket price. With the introduction of health insurance to this market, the out-of-pocket price that consumers pay will be lower than the original equilibrium price.

The total value that patients allocate to the additional units of health care is, ∆Q = QH — Q*. The summation of the areas of D and E is the result of the moral hazard of health insurance. Cutler and Zeckhauser (1999) write that empirical evidence indicates that moral hazard and demand-inducement, that is derived demand from the demand for health care, are both important in a quantitative sense.

The additional social cost incurred from producing the extra units of health care is the sum of the areas C, D, and E. In this market the “deadweight loss” or decline in “social welfare” due to the implementation of the health insurance program is measured as the area of C. Based on the social loss from the introduction of health insurance into this system, it may be seen as an inefficient policy.

The Models of Health Insurance

For an extensive examination of differing models, Reid (2009) lays out four examples that are being employed around the world. The models he outlines are (1) The Beveridge Model, (2) The Bismarck Model, (3) The National Health Insurance Model, and (4) The Out-of-Pocket Model.

The Beveridge Model relies on a large government role. The government is responsible for providing and financing the program. The funds are gathered through tax payments from citizens. Traditional economic intuition would say that increasing the tax rates on consumers is a poor fiscal stance.

However, the flip side to this argument is that if employees are healthier they will spend less time away from work due to illness and therefore their overall productivity in a time period would increase, ceteris paribus. There are some countries that make use of the Beveridge Model or some variation of it, such as Great Britain, Spain, New Zealand, and most of the Scandinavian counties.

The Bismarckian model is different from the Beveridge model in that it is funded primarily through employers and employees via mandatory deductions in payroll. This may have a direct impact on labour costs, because effectively the cost to hire more workers increasing. The goal is that it aims to give everyone medical cover and there is no profit-seeking motives, meaning, in an economic sense, that all available resources are allocated efficiently. If for example, the program is making a profit, then by assumption, resources should be shifted towards taking care of the next available sick person and hence the profit will diminish. One of the drawbacks of this model, is that the unemployed who are unable to contribute, because they are below the minimum tax-bracket, still have access to the benefits that such a program brings. For the poor to have fair and equal access to the services that the program covers, they will need to be subsidised by the government.
This model is currently being used by Hong Kong, albeit in its own way, as well as many European countries such as France, Germany, Austria, and Switzerland to name a few.

The National Health Insurance model is unique in that it contains elements of the Bismarck and Beveridge models. Its services are provided by the private sector, but the payment for the services is paid out from a government-operated insurance scheme that every citizen is required to pay into. The advantage of this type of model over the Beveridge and the Bismarck models is that in having a single payer, it allows for more bargaining power when negotiating for lower prices of services.

The Out-of-Pocket Model is the last one that Reid mentions in his book. It is based on the inherent problem with developed economies in that it discriminates between different classes of people. In this model the poor are not privileged enough due to their socio-economic standing in society to have access to the quality health care afforded to the rich whom have the means to pay for such services, effectively relegating the poor whom are sick to stay sick and eventually die.

Bennette and Gilson (2001) comment that models like the Beveridge and National Health Insurance, which are tax funded or mostly tax funded, are biased towards hospital and urban services. There are also the problem of transport costs and time which may prevent the poor from having true access to the services covered by the programs.

In weighing up the economic benefits and costs to a society from a health insurance standpoint, Currie and Madrian (1999) say that a sick employee has two potential costs to an economy. Firstly, they say that the productive capacity of a sick employee is lower than that of healthy employee of equal ability. Second, they suggest that a sick employee, or one with sick dependents, tend to generate higher medical costs. The cost that sick employees represent may be difficult for the employer to mitigate if they are constrained in their ability to reduce the remuneration of sick employees due to their lower productivity. If for example, employers are faced with anti-discrimination legislation or minimum wage policies, sick employees may face a higher chance of being retrenched.

South Africa’s National Health Insurance Policy Initiative

The model of health insurance that the South African government is using has the following significant factors: (1) it is compulsory, (2) it puts a ban on private health care schemes, and (3) the insurance is controlled under a single “bureaucracy”. This is consistent with the Bismarckian model of health insurance.

The total cost of the proposed program set forth by the government is projected to be R256 billion in 2025 when using 2010 as the base year. This figure is the expected rise assuming annual real growth in costs of 6.7% from 2015/16. (Treasury, 2015) Based on the figures that are presented in the document, the percentage of GDP that public health spending accounts for would increase from approximately 4% currently to around 6% by 2025/26. The aforementioned growth figures are founded on the assumption that the economy will grow at an average of 3.5% per annum. It is a widely-held view that low GDP is a barrier to achieving uniform health care as Stuckler et al. (2010) write.

Using projections from National Treasury, if the baseline public health budget, which is sitting at R109 billion using 2010 prices, were to increase by 2% per year, the shortfall in funding would be approximately R108 billion in 2025/26. The below figure adapted from the White Paper shows the funding shortfall under the different growth paths.

If one was use the model of national health insurance that is proposed, which relies on funding from both the private and public sector, the level of total spending on health services in the 2013/14 period was 8.6% of GDP. That figure increased at an average yearly rate of 1% over the three years since. The report breaks down the above figure, saying that approximately 4.1% of the total spending was due to the public sector, while around 4.5% was accounted for by the private sector.
In terms of financing its national health insurance program the National Treasury lays out some options for raising the tax revenue needed to meet the expenditure required to make such an initiative viable. The main sources of taxation revenue that the South African government collects from the public are value-added tax (VAT), personal income tax, as well as corporate/business income tax. These three taxes made up just over 80% of the total collection from taxes in 2011/12.

Of course, given the estimated cost of fully funding such a program, as well as the current rate of tax collection as a percentage of GDP, it is inevitable that the government would have to raise the tax rates in order to lessen the burden. This will decrease the need for the government to borrow from the international market which would put further strain on our already weak and volatile currency.

Under the current fiscal climate, the National Treasury has proposed multiple scenarios whereby they would increase one or more of the three main tax sources over period of time if they were to cover the 2025/26 cost of the insurance program. Alternatively, it is stated that other forms of tax can be increased in order to decrease the estimated shortfall. Musgrave (1959) says that the financing of medical care by the public is warranted by its status as a merit good.

Given that the South African economy grew at below 1% in 2015, according to the World Bank’s Global Economic Prospect Report (2015), the shortfall will be far greater than the projections of the National Treasury. Meaning that the government would have to borrow which would lead the country to be further indebted. If the rate of tax as a percentage of GDP remains at the low level, on average approximately 15%, the primary deficit may increase from its 2015 figure being 4.07 per cent of GDP. (OECD, 2015)

International Examples of National Health Insurance Policies

Over the past few decades there have been many attempts by both developed and developing economies to introduce a form of national or social health insurance. Each government had the idea that the program would benefit its citizens by affording a better quality of health care for those that may never had the opportunity of experiencing it. Over the course of this essay it has been laid out that implementing a NHI program is a hard task for any government and that there may be no way to make it completely “free”.
Reich et al. (2016) conducted a multi-country study that demonstrated that a universal health care system is a complex process, fraught with difficulties, may different pathways, and various pitfalls. The authors conclude by saying that with all the perceived problems in terms of implementing a universal health care system in mind, it is feasible and achievable.

Given China’s experience, which involved cost escalation that occurred after it implemented market-orientated reform beginning in 1978; Lui and Hsiao (1995) warn other countries that the cost of the social health insurance program will inevitably rise, if the increase in costs is predominately caused by factors outside of its control, such as inflation, increased enrolment, or aging of the citizens covered by the program.

Baribault and Cloyd (1999) compare and contrast the health care systems of the United States, Canada, and the Netherlands. They write that the United States’ health care program is split up into Medicare, which services citizens whom are over the age of 65 as well as any younger people whom qualify due to certain illnesses. This program is funded through federal income taxes. If a citizen does not have access to health insurance due to being classed as too poor, they are eligible for Medicaid, financed through a combination of state and federal taxes. One advantage of the American health care system is the freedom of choice afforded to both doctors and patients. But the obvious downside is the outrageously high cost of receiving such care.

Canada on the other hand has a government-run, “free-for-service” system. The cost of universal coverage is through payments from subscribers as well as taxes. Any shortfall in funding the program will be provided by the government through grants and personal and corporate income tax revenues. (Inglehart, 1986a) The obvious advantage of the Canadian health insurance system is that there is universal coverage for its entire population. The fund is managed through a single source and the costs of administration are much lower. The disadvantage is that there have been long waiting lists for crucial and expensive services and some hospitals are in poor condition due to a lack of funds to maintain them. (Inglehart, 1990) and (Orford, 1991)

Brazil established a health care system in 1999 with the goal of having decentralised universal access. The aim was to have municipalities providing the necessary care to individuals financed through the federal government. According to the Bulletin of the World Health Organisation (2008) the key too Brazil’s system was primary care. Approximately 70 per cent of Brazil’s total population receives health care from the system. While much of the care is given to the proportion of those that cannot afford any health care, the people who cannot afford to stand in queues and want to avoid the inconvenience of the public care system, rather choose private service providers. Overall, the bulletin heralds Brazil’s national health system as “an outstanding success” despite long queues, doctors and nurses being forced to use outdated and faulty equipment, and the general scarcity of health professionals in the rural areas.


Given that South Africa has one of the worst GINI coefficients according to the OECD, and that the Bismarckian model of national health insurance requires that the country in question has a relatively small informal sector, as the model relies heavily on payroll deductions. South Africa’s current unemployment rate is a testament to this. Without people whom are earning enough money, covering the cost of the NHI program through payroll deductions will be difficult. Bearing in mind the thin tax base already confronting South Africa’s National Treasury, the approximated cost of providing free-for-all health care in just ten years will be far too large. This based on Finance Minister Pravin Gordhan’s allocation of R164.8 million of the 2016 National Budget towards health care.

If South Africa were to be able to afford fully funding its NHI program, it would require growth in excess of 5% per annum from its current rate of below 1%. If it is unable to grow the economy at those levels the shortfall in funding would be too large and would require the government to borrow from other countries. This would lead to even more uncertainty about South Africa’s ability to pay back its debt and hence increase the likelihood of being downgraded as an investment destination which may induce capital flight from the financial sector. This would further worsen the already tough economic climate facing South Africa.

Analysis of international examples of national health insurance programs found that many of them have been largely successful in delivering health coverage to a large proportion of each country’s population whom are unable to afford even basic health care. While a lot of success stories have been published and written about over the years, one should keep in mind the enormous costs involved as well as the inevitability of rising costs, and the general poor standard of public health providers makes the long-term feasibility of a NHI program uncertain.

There is a lot of positives that a Bismarckian national health insurance model gives to the government in terms of flexibility when it comes to negotiating a lower price from service providers. But as has already been stated the current economic landscape that South Africa is faced with isn’t conducive to a universal health insurance program.

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