What an investment strategist thinks of the NHI Act

National Health Insurance (NHI) as incorporated in the NHI Act, is really an investment in the healthcare of the country’s citizens. President Cyril Ramaphosa signed the NHI Act into law last week and medical scheme provider Discovery’s shares fell by 8%, briefly making people wonder if the Act is also an investment issue.

The NHI Bill was first announced by former president Jacob Zuma in 2014 and has been controversial since then due to its overall impact on the structure of the healthcare industry in South Africa.

“It is our view that the NHI Act will be challenged in court. There are multiple concerns, including the quality of the legislation, the constitutionality of the Act and the processes followed during the adoption of the Bill,” Osagyefo Mazwai, investment strategist at Investec Wealth and Investment, says.

ALSO READ: Discovery supports better healthcare, but not the NHI Act

However, at this point, Mazwai says, the market seems to estimate that the signing of the NHI Act is an “industry-specific risk” (pricing in of higher policy uncertainty regarding the longevity of private medical schemes in South Africa) and not a risk for the entire economy.

Timeline for implementation of NHI Act

The initial timeline for the full implementation of the NHI Act, according to then-health minister Dr Aaron Motsoaledi, was around 15 years for three phases. Now, Mazwai says, with various organisations planning to challenge the Act in court and even the Constitutional Court, the legislation may be held up in court for even longer.

“However, even under the assumption that the legislation is not challenged in court, it is unlikely to be rolled out soon. In an interview in 2022, Dr Nicholas Crisp, deputy director general at the department of health, said anything between 14 and 20 years would be a good time. Our view is that it will probably take longer.”

ALSO READ: NHI shows how schizophrenic South Africa’s government is – BLSA

He also points out that Crisp mentioned in his interview that Japan took 34 years to implement its equivalent, while other countries took even longer. Even if SA can learn from the rollout in other countries and accelerate progress, implementation will likely not happen anytime soon, he says.

Investor sentiment on NHI: why not work with private sector

Investec recently hosted a healthcare industry conference and one of the key messages from the panel discussion on NHI legislation was that it would be negative for overall investor sentiment.

Mazwai says the NHI Act inherently raises questions about property rights and analysis by Webber Wentzel in 2023 raises the question of constitutionality of the Bill when it comes to “the property rights of medical schemes and their administrators”.

The law firm states that the key question to answer is what the role of medical schemes will be going forward and whether these schemes will continue to exist, he says.

“Another constitutional issue raised was the right to freedom of choice and a citizen’s right to healthcare and choice related to the healthcare provision. Discovery Health mentions the limitation of this right being similar to a limitation on South Africans’ choice to ‘purchase additional security or private schooling’ under the premise that security and schooling are already covered in the national system.”

ALSO READ: Disappointment, concern and court after Ramaphosa decides to sign NHI Bill

When Ramaphosa was in Davos for the World Economic Forum, the most prominent question posed to him was on the issue of NHI. Why would business invest when the NHI Bill sends a message that the government does not want to work with the private sector?

Mazwai says given the questions on investor sentiment and the overall constitutionality of the Bill, Investec would expect marginal short-term volatility for the rand and SA Inc. assets as a sort of knee-jerk reaction.

“But in the likely event that there will be court challenges we can expect a potentially long, drawn-out legal battle with little direct impact on the healthcare industry aside from morale perhaps affecting the willingness of healthcare professionals to stay in SA, until the courts’ final determination.

Flouting of necessary processes

Another view expressed at the healthcare conference was the flouting of processes by the National Council of Provinces (NCOP) in terms of the approval of the legislation, he says.

“The view shared indicated that at least three provinces expressed issues with the NHI Bill. Minutes of the NCOP meeting on 6 December 2023 indicate that eight provinces supported the Bill, with one (Western Cape) opposing. The private sector also made various submissions to parliament and the presidency challenging the legislation as flawed and impractical.”

ALSO READ: Health minister says NHI will be implemented over next four years

Mazwai says the question about the processes followed will potentially form part of the submissions to the courts in terms of challenging the NHI Act in its current form. The private sector believes that it has made more pragmatic submissions to the president and parliament.

State’s capacity to implement NHI Act

State incapacity will also likely form part of the submissions to the courts, he says. Various stakeholders expressed the view that the current public healthcare system is ineffective and the state has already shown an inability to provide constitutionally protected healthcare for South Africans.

“Opposition to the NHI Act is not typically related to the overarching objective of the NHI, which is to provide universal healthcare in South Africa as a means of guaranteeing constitutionally enshrined healthcare access but rather the mechanism sought and its practicality.”

ALSO READ: Increasing taxes to fund NHI will ‘destroy economy’ – expert

This forms part of a line of argument that greater operational efficiencies in the public healthcare system would be the first route of action in ensuring access to quality healthcare, he says.

Funding NHI another sticking point

The legislation provides for mandatory pre-payment for NHI, which could be challenged. Mazwai says the state intends to introduce a mandatory general tax, with contributions for people earning above a set amount and monthly contributions made by employees and employers.

“Another challenge for the overall funding of NHI would be South Africa’s growth trajectory. South Africa is expected to grow at around 1% on average over the next three years, which will already put pressure on employment, corporate profitability and tax collection.

“National Treasury expressed a view in the February 2024 budget that South African taxes are already elevated and bracket creep would be the main mechanism for increasing tax collection.”

ALSO READ: Rand soars but SA economy keeps struggling in first quarter

Analysis by Moonstone and Discovery concluded that the funding for NHI stands at approximately R200 billion a year, which is the equivalent of just under 10% of the state’s tax revenues of R2.155 trillion in 2023/2024. Additional analysis by Moonstone notes that the unintended consequence of raising tax rates could be less tax collected.

NHI’s impact on the market and economy

Mazwai says so far there has been limited impact on markets, presumably because of how long it will take to implement and the uncertainty around whether it will be sent back by the courts.

“The next step to look out for is how it will be financed. The Medium-Term Budget Policy Statement is typically delivered in October and we believe that it is probably too soon for Treasury to provide firm guidance.”

He says more information on the funding elements will likely be available in February next year when the Budget is presented and therefore, the earliest that we will be able to gauge how it will affect markets over the medium term will be at the time of the Budget, but even then it might be too early to say.

“The benign reaction of the rand/dollar exchange rate and the JSE All Share suggest that the market views the signing of the NHI Bill as an ‘industry-specific’ risk and does not view it as a country risk at this point.”