Why are medical scheme tax credits important?

Medical tax credits are important in South Africa because they make it possible for consumers of all income groups to stay on their medical aid schemes and not become dependent on the already overburdened public health system.

Finance Minister Enoch Godongwana’s recent announcement in his budget speech that medical scheme tax credits will remain intact is a tacit acknowledgment of their vital role in sustaining South Africa’s healthcare system, Thoneshan Naidoo, CEO of the Health Funders Association (HFA), says.

“The retention of medical scheme tax credits is a clear recognition by government that these incentives help keep people on private medical schemes, reducing the strain on public hospitals and clinics.”

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Who benefits from medical scheme tax credits?

Naidoo says it is a common misconception that medical scheme tax credits, amounting to approximately R30 billion annually, primarily benefit high-income earners.

However, he points out, data from National Treasury tells a different story:

• 21% (R6.3 billion) of the R30 billion benefits individuals earning below R250 000 per year;
• 64% (R19 billion) supports people earning below R500 000 per year, including a wide range of professionals such as teachers, nurses, civil servants, call centre agents, plumbers, electricians and other skilled tradespeople.

According to the South African Revenue Service (Sars), 80% of all South Africans earn less than R500 000 per year.  Naidoo says that although not all individuals in this income bracket are members of a medical scheme, the tax credit serves as a crucial financial relief mechanism for those who are.

“These figures underscore that medical scheme tax credits are not just a benefit for the wealthy, but rather a progressive intervention that provides targeted assistance to middle- and lower-income earners. The principle of medical tax credits is well-established in developed countries like Australia, where tax rebates incentivise individuals to take out private health insurance.”

He says that by ensuring that a significant portion of the population finances their own healthcare, the government can allocate public healthcare funds more effectively to the poor and vulnerable, reducing strain on the public healthcare system.

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Tax credits put R4 368 back in each member’s pocket

Currently, the medical scheme tax credit is R364 per month for the main scheme member and the first dependent, with an additional R246 per month for each subsequent dependent. This equates to an annual reduction of R4 368 in personal income tax for a medical scheme member.

“Aside from easing pressure on public healthcare facilities, the tax credit is financially beneficial for government. The cost of this tax credit is significantly lower than what the government would spend if the same individual required treatment in the public healthcare system. Keeping this incentive in place makes financial sense,” Naidoo says.

He points out that governments use tax incentives to influence behaviour, not just to generate revenue, such as:

• The sugar tax that serves as a revenue stream as well as a deterrent against excessive sugar consumption, helping to combat diabetes and obesity.
• High cigarette taxes that act as a source of government income as well as a public health measure to discourage smoking.

Naidoo says that in the same way, medical scheme tax credits encourage individuals to maintain their private healthcare coverage, reducing demand on public healthcare services.

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Could medical scheme tax credits not be used to fund NHI?

Could the medical scheme tax credits be used to fund National Health Insurance (NHI)? Naidoo says definitely not. “There is a misconception that medical scheme tax credits are a revenue stream that can be repurposed for NHI funding.

“In reality, this is a tax liability for Sars, not a budgeted expenditure. It is not a pool of funds that government collects and redistributes. Even if these credits were removed and the additional tax revenue redirected to NHI, the financial benefit would be minimal. Given the scale of government healthcare expenditure, the recovered funds would barely make a dent in the resources required for a fully functional NHI.”

In fact, he says, removing the medical scheme tax credits would increase personal tax for medical scheme members and have unintended consequences, potentially leading to an exodus of members from private healthcare and an increased burden on public hospitals and clinics.”

By retaining medical scheme tax credits, government ensures that the healthcare system remains balanced, supporting private healthcare while safeguarding public healthcare resources for those who need them most, Naidoo says.

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9.1 million members benefit

South Africa has 9.1 million medical scheme members who benefit from these tax credits. However, there are also 11 million uninsured individuals who rely on private healthcare as their first point of contact, paying out of pocket for services.

Leveraging medical scheme tax credits alongside the introduction of Low-Cost Benefit Options (LCBOs) could extend private healthcare access to an additional 6 million low-income South Africans. This would allow government resources to be reallocated to essential services for the most vulnerable populations, Naidoo says.

“Medical scheme tax credits play a vital role in sustaining South Africa’s healthcare ecosystem. They help sustain private medical scheme membership, reduce strain on public healthcare resources and offer financial benefits to individuals as well as the state.

“By maintaining medical scheme tax credits, the government is reinforcing a system that balances public and private healthcare. Instead of dismantling this system, policymakers should prioritise reforms like LCBOs that expand healthcare access while maintaining financial sustainability.”