HPU
Life is about choices
Author: Jasson UrbachDate: 15 January 2010

The reality of life on our planet is that resources are limited but the wants of people virtually unlimited. Because we cannot have as much of everything as we would like, we are forced to choose from whatever alternatives are on offer. When resources are used to accomplish one thing, it reduces their availability for others.

Similarly, government’s available pool of revenue to fund competing alternatives such as policing, schooling and health care is limited whilst the demand for these services is virtually unlimited, especially when they are perceived as being free. And it becomes all too clear that if funds are used for one service, it reduces the amount available for the others.

Most rational people would like to receive free food, free health care, free education, and even free housing and free clothing. However, although these goods and services are being provided ‘free’ to some individuals, in reality this is not so because other South Africans are paying for them. This fact is often encapsulated by economists using the simple saying “there ain’t no such thing as a free lunch” or TANSTAAFL. Like any other government, the SA government may be able to shift costs but it can never avoid them.

In 2007/8, SA’s tax revenue was an estimated R599.3bn (29.1% of GDP). Personal income tax was the SA government’s main source of income where an estimated 5.2 million personal income tax payers paid approximately R169bn to the government (29.5% of budget revenue, the balance made up from 26% VAT, 24.5% corporate income tax and the remaining 20% from fuel levies, excise and customs, etc.)   If we disaggregate this data we find that a small minority of taxpayers pay a significant proportion of the total tax take. For example, in 2006, of the approximately 3.2 million taxpayers assessed, about 70% (those with taxable income between R50,000 to R300,000 per year) accounted for almost 55% of personal income tax. The bottom 21% of taxpayers (with taxable income below R50,000) accounted for less than 0.5% of income tax assessed while the top 7% of taxpayers (with taxable income in excess of R300,000 per year) accounted for about 45%.

A rough cost of a “free health care for all” proposal is possible, although no official documents pertaining to its financing have yet been released. If we assume a modest R400 per person per month (R4,800 per annum) and take into consideration that SA’s population is about 49 million people, the estimated cost of providing “free health care to all” amounts to about R235bn per year (more than the total personal income tax collections and equivalent to 39.2% of the total budget tax revenue for 2008).

What has been proposed is that “free health care for all” will be funded out of general taxes as well as a dedicated payroll tax shared between employers and employees. But, as pointed out earlier, government has only a fixed pool of revenue and expenditure in one area can come only at the expense of another. A dedicated payroll tax means that employers will shy away from hiring more people because the cost of labour will increase. This, in turn, will exacerbate SA’s chronic unemployment problem. For employees, there will be less after-tax income, which will reduce their disposable income for household goods and services, as well as for savings - a vital requirement for future investment. Employees who already contribute to medical schemes, will be taxed three times for health care if they continue their membership - through general taxes, the proposed payroll taxes and finally through medical scheme contributions.

It is impossible for governments, with the best will in the world, to raise enough funds to provide every citizen with unlimited police protection, education or health care. The decision to provide the police with an extra 9mm gun comes at the expense of a hospital bed or part of a teacher’s salary.

To get the most out of our limited resources, only actions that generate more benefits than costs should be undertaken. When government promises “free health care for all”, we know that that cannot be – someone is paying the price. Providing care for all, also, does not make particularly good use of scarce resources. It should not be an ‘all-or-nothing’ decision. The cost of providing one additional member of society with health insurance has to be weighed against the cost of providing protection to another or educating yet another.

Protect scarce resources. Confine public health insurance to people who cannot afford to pay for their own health care – do not introduce a “free health care for all” policy that covers everyone, no matter how rich they are. Many South Africans are quite capable of paying for their own health care, only some of them will choose not to insure because of other priorities.

If government views “health care for all” to be politically essential, then it should require the population to privately and individually purchase mandatory, healthcare cover. Furthermore, instead of undertaking the management of taxpayer-provided funds intended for covering the medical costs of the poor itself, government should put the task out to tender. This will provide publicly funded patients a multiplicity of medical schemes to choose from. Public hospitals and clinics will compete with each other and with private facilities to win business from taxpayer-funded public health insurance beneficiaries.

Universal healthcare coverage should be seen as a very dubious second best option for a developing country such as SA with its high levels of unemployment, poverty and crime and people living without housing or title to their property. Universal health care politically is just a band-aid to soothe much wider structural problems.

Government must focus on increasing the wealth of SA’s citizens. Making health care a priority before addressing the wider structural issues is putting the cart before the horse. “Free health care for all” might be a politically expedient option but when viewed through an economic lens it reveals the potential for certain known negative consequences. They are, but not limited to: increased waiting times for patients due to the unlimited demand created when something is perceived as being free; increased brain drain of skilled healthcare personnel due to increased burden placed on scarce resources, and reduced quality of health care as a result of increased demands on the public healthcare facilities.

As a humanitarian, I wish to see SA with the best possible healthcare provision, developed carefully, with the full and enthusiastic involvement and co-operation of all the people who will provide and pay for it, as well as from those who will benefit from it.

Author: Jasson Urbach is a director of the Health Policy Unit. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s.

HPU Feature Article / 15 January 2010