NHI Bill Signed — What's Next For Private Healthcare?

President Ramaphosa hurriedly signed the controversial National Health Insurance (NHI) bill into law days before the end of his term. Foord’s healthcare analyst Dhersan Chetty unpacks the implications of the NHI, given the widespread worries about its implementation and the feared death knell of the private healthcare industry.

There was much uncertainty and fear surrounding the signing of the National Health Insurance (NHI) bill into law just days before the end of President Ramaphosa’s previous mandate. The timing could have been driven by emerging clarity that the ANC would lose its parliamentary majority — and some hope that the NHI might boost the ANC’s electoral chances.

In this regard, it backfired spectacularly. While the NHI is aspirational in its objectives of providing free healthcare to all South Africans, it has created much worry for the voting members of the country’s private medical aid industry — of all races — in terms of potentially higher taxes, execution and risk of corruption. 

The NHI’s proposal to create free healthcare for all citizens — including GP visits and hospital care — is admirable. In its current form, however, the NHI introduces tremendous and unresolved constitutional, commercial, implementation and political challenges.

The most worrying provision for existing medical aid members — covered by section 33 of the Act — is that private medical schemes will be banned from providing cover for any procedure covered by the NHI. This is the most legally contentious issue and the one that is likely to face the most constitutional challenges. The implication is that — in time — private medical aids will shrink to providing only the most fringe medical services not covered by the NHI.

Commercially, the NHI fund seems highly ambitious and unaffordable, given the country’s poor financials and high tax rates. Assuming that all other challenges are resolved, to provide full primary and hospital coverage to the nation is estimated to cost north of R200 billion annually. For context, this accounts for 36% of national payroll tax or 62% of corporate tax. The ANC has yet to propose a funding model for the NHI, saying only that it will be developed over time. The magnitude of the funding requirements suggests that the likelihood of NHI getting to the point of replacing medical schemes anytime soon is extremely low.

From an implementation perspective, it would take at least five to seven years just to set up the structures of the single NHI fund, excluding time taken to resolve court challenges and political adjudication. Once the fund is established, it would focus primarily on primary healthcare, and then start contracting for hospital care with accredited providers. However, as there are very few public hospitals that meet the quality criteria to contract with the NHI fund, it would therefore have to contract predominately with private hospitals. The expectation is that this second phase of NHI implementation could also take five to seven years. The process would be one of negotiation — private hospitals will not be forced to contract with the NHI, they will only do so if they enjoy spare capacity. 

Politically, the NHI fund faces headwinds from the GNU coalition government — it was not supported by the ANC’s DA and IFP coalition partners (both voted against the bill in parliament). Nevertheless, it remains a multi-decade vision for the ANC, which might return to majority power in time. It is therefore likely to remain unrescinded, but with difficult and slow implementation in the near term.

The NHI has obvious implications for the private healthcare industry in South Africa. For investors, these relate principally to private hospital groups on the one hand and medical aid providers on the other. In the long term, the risk is that government might implement a payroll tax on a sliding scale to fund free cover for only some medical procedures. Medical aid members will suffer this tax plus the cost of their medical aid premiums. 

While this scenario is negative and frustrating to the consumer, it does not have a material impact on the hospital stocks that we own, such as Netcare and Life Healthcare, because consumers are likely to keep their medical scheme cover rather than move to the public sector. In contrast, medical schemes — such as those provided by Discovery — are the most exposed to NHI. We have no exposure to medical aid scheme providers or administrators in the Foord unit trust funds. 

For hospital groups then, we see no impact in the short to medium term. In the long term, they could actually benefit from contracting with the NHI to fill up spare capacity, since the proceeds of a payroll tax will most likely be used to fund primary healthcare and to upgrade public hospitals rather than provide full hospital cover. 

Hospital stocks have performed well in the recent market rally — rising 23% since the May elections — given their high ‘SA Inc.’ exposure and the lower probability of the NHI being implemented in a coalition government. Nevertheless, we believe that the sector could still provide significant upside from current share price levels, given the prospect for defensive earnings growth, high free cash flow generation and strong balance sheets.