How Will The Health System Cope Over The Next Four Years?

Introduction

Given the fiscally constrained medium term projections in the 2021 Budget, this brief explores the financing of health care expenditure and its implication for service delivery up until the 2023/24 financial year. The assumptions and projections in the Budget are used throughout the table below. Once the baseline projection has been presented, a brief discussion follows of what might happen if the assumptions are violated.

The analysis

The analysis proceeds by means of a row by row discussion of the table. All values are in current prices, unless otherwise stated.

Panel A

Rows 1 to 5 present successive estimates and projections from the 2019 to the 2021 Budgets, including the 2019 and 2020 Medium Term Budget Policy statements. Row 6 extracts current estimates and projections. Row 7 adds local government expenditure from own revenue. Rows 8 and 9 add in medical expenditure financed by the Compensation Fund and Row 10 presents aggregate expenditure in the public sector. Row 11 converts Row 10 into an index.

Panel B

Panel B presents an economic and demographic framework for what follows. Row 12 presents the GDP deflator, which permits conversion of GDP in current prices to GDP in constant prices. Row 13 presents GDP itself in billions of rand and Row 14 presents compensation of government employees in billions of rand and Row 15 converts Row 14 into an index. Row 16 presents United Nations estimates of the South African population[1] in thousands and Row 17 converts Row 16 into an index.

Panel C

Panel C calculates per capita expenditure on health in the public sector. Row 18 calculates average aggregate health expenditure per capita in current prices. Row 19 presents the consumer price index and Row 20 calculates aggregate health expenditure in constant 2020/21 prices. Row 21 converts Row 20 into an index. It indicates that the quantity of health services per capita will drop by 14.2% between 2020/21 and 2023/24.

Panel D

Row 21 presents too pessimistic an indicator of the quantity of health services provided in the public sector, because the intention of the 2021 Budget is to hold employee compensation costs to below inflation. So a unit cost index is computed in Row 22, assuming employee costs will evolve according to the compensation index in Row 15 and other costs according to the GDP deflator in Row 12. Row 23 rebases Row 22 from 2018/19=100 to 2020/21=100. Row 24 then calculates a quantity index, based on per capita expenditure in current prices from Row 18 and the unit cost index in Row 23. This indicates that the quantity of health services per capita will drop by 9.6% between 2020/21 and 2023/24.

Panel E

Panel E takes the analysis forward by considering the gap between the financing needed to keep the quantity index in Row 24 constant and the projected financing. Row 25 calculates the gap. Row 26 calculates the impact on the gap associated with spreading resources more thinly by not allowing expenditure to rise with population. This is bound to happen on projection assumptions, as the system battles to continue to afford the resources it currently has. This by itself does not close the gap, as Row 27 indicates. The only other source of savings would be to squeeze some of the rent out of the costs of procurement by the public health system, no easy task as spending on COVID-19 attests. A saving of 4% in non-employee costs (see Rows 28 and 29) would close the gap in 2021/22, but would still leave a gap in 2023/24, as Rows 25, 30 and 31 show.

Panel F

Panel F presents estimates and projections of household consumption expenditure. The index in Row 32 is taken from the 2021 Budget projection and Row 33 calculates household consumption expenditure itself.

Panel G

Panel G presents estimates and projections of the components of private health expenditure (Rows 34 to 38), all projected to grow at the same rate as household consumption expenditure. Row 39 presents total private health expenditure and Row 40 displays the percentage of total health expenditure provided by the private sector. By 2022/23, the percentage recovers to its 2019/20 level of 51.3% and in 2023/24 it rises further to 52.4%.

Panel H

Panel H presents estimates and projections of health expenditures across beneficiaries: all (Row 41) for expenditures benefiting the entire population, medical aid beneficiaries (Row 42), the medically insured (Row 43), and those who are neither medical aid beneficiaries nor medically insured (Row 44). Row 45 presents aggregate health expenditure for the system as a whole. Row 46 presents aggregate health expenditure as a percentage of GDP. It rises from 9.0% in 2019/20 to 9.9% in 2020/21 (because of the contraction in the denominator) and then declines again to 9.0% in 2023/24.

General interpretation

Given the projection assumptions, the health system will be under increased strain. In the public sector, it will not be possible to increase the size of the provision to compensate for a rising population, and if value for money in procurement in not improved, services will have to be cut. In the private sector, continuing rises in medical aid premiums above the inflation rate will press against modest rises in household consumption expenditure, prompting some to trade down between options provided by medical aid, or even to cancel it altogether.

What happens if the projection assumptions are violated?

The principal risk is that the unions manage to punch a hole in the government’s wage restraint policy. If this happens, the unit cost index will rise. It may be that the government will accommodate the change in employee compensation costs fully in future medium term expenditure projections, increasing health expenditure projections accordingly. With such accommodation, there would be no change in the quantity index. With less than full accommodation, the strain on public health provision would increase.

The second risk is that economic growth comes in below or above the projection in the 2021 Budget. We must hope that the latter is the case. If the former happens, the health sector is in for a very difficult time.

Conclusion

Introduction of National Health Insurance requires substantial modernization of the public health system. Finding money for the improvements up until March 2024 is going to be very difficult.

Charles Simkins
Head of Research
charles@hsf.org.za

[1] United Nations, World Population Prospects, 2019