The Tribune

• Insurer: ‘Significant’ cost rise even at ‘smallest level’

• Consumer medical bills could jump up to three-fold

• No decision on appeal yet by $200m claims sector

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian patients were yesterday warned to brace for “a shock even at the smallest levels” as the change in VAT’s treatment of medical insurance claims payouts will further fuel already-soaring medical costs.

Julian Rolle, BAF Financial’s managing director, told Tribune Business the financial fall-out “is certainly significant for the consumer” once Bahamian health insurers are no longer able to recover VAT on annual claims collectively worth over $200m with effect from April 1, 2023.

Echoing concerns already voiced by industry body, the Bahamas Insurance Association (BIA), he added that healthcare will be “definitely more expensive, certainly less accessible” as a result of the treatment shift driven by the Department of Inland Revenue (DIR) and Ministry of Finance.

With insurers soon unable to recover the 10 percent levied on claims payouts, Mr Rolle told this newspaper that the increased VAT burden will inevitably be passed on to the end-consumer - patients - with premiums also set to rise and further hike “the cost of care” due to inflationary pressures.

Examples of the financial consequences, provided yesterday to Tribune Business, show that in some cases a patient’s medical bill could more than triple compared to present expenses if hospital treatment is required. And Mr Rolle said the cost increase is “not insignificant” for those using private health insurance to purchase medications vital for treating diseases such as diabetes, hypertension/high blood pressure and heart disease.

In the case of a patient purchasing $100 worth of medicines, and where private insurance covers 80 percent of the cost, that individual would be responsible for the $20 co-pay/deductible balance. The latter would attract 10 percent VAT, adding an additional $2 to the patient’s share, resulting in their total bill coming to $22.

But, from April 1, with insurers unable to recover the VAT payable on their $80 share, the client will now be responsible for paying the additional $8 in tax as well. This will take the sum due from the patient from $22 to $30, an $8 or more than 36 percent increase. Given that medications have to be refilled regularly, this represents a recurring and increased financial burden at a time when Bahamians are already struggling to make ends meet due to the cost of living crisis.

When it comes to hospital care, Tribune Business was shown two examples of how the changed VAT treatment will impact medical bills of varying sizes. The first involved a patient requiring $2,000 worth of treatment, with their ‘out-of-pocket’ costs pegged at $250. Under the present tax treatment, they only have to pay VAT worth $25 (10 percent) on that $250 share, leaving their share of the medical care expense at $275.

Yet, when insurers are unable to reclaim that VAT, the patient will now also be liable for paying the 10 percent levy on the $1,750 claims payout. This will add a further $175 to their bill, taking the total amount they must fund to $450 - a 63.6 percent increase in their financial burden.

The sums and percentage increases become greater the higher the cost of care. The final example involves a patient who requires a five-night hospital stay that incurs $12,500 in medical bills. The ‘out-of-pocket’ expense is $500 and, under the current structure, the patient will only pay 10 percent VAT on that latter sum, incurring $50 in tax and taking the total payment to $550.

However, from April 1, the patient will also have to pay the VAT levied on the insurer’s $12,000 claims payout. That will amount to $1,200, taking the patient’s own payment to $1,750 - a more than three-fold increase from what his/her financial exposure would be currently.

Mr Rolle said it was impossible to presently determine how businesses (group health insurance) and individuals will react to the prospect of increased medical bills and premiums, but warned that this will only worsen healthcare industry inflation that is typically running at 7-10 percent annually.

And, with patients/consumers already paying VAT on their premiums, he added that mandating they also pay the tax on claims payouts was “clear double taxation” with the industry unable to grasp why the Government had decided to alter the tax treatment. The Ministry of Finance, though, says the change is necessary because allowing insurers to reclaim VAT on claims payouts breaches the law and is depriving the Public Treasury of millions in vital revenues.

“Medical inflation across the board is already, give or take, 7-10 percent,” Mr Rolle told Tribune Business. “The [insurance] industry has really tried to hold down costs over the last three years as we were going through the pandemic, but at no point did medical inflation stop during that period.

“It will be very difficult to offer coverage at similar levels without raising the premium and, in addition to that, as we look at the impact on cost, it’s not just related to medical services such as seeing a doctor but recurring services such as medicines and therapy. The VAT related to those will now be borne by the person receiving the service or medicine. Definitely more expensive, certainly less accessible.”

The Insurance Commission of The Bahamas’ annual report for 2021, containing the last set of available data, shows that almost $206m worth of health claims were paid by Bahamian insurers that year. That was split into $175.202m on behalf of group clients, usually businesses providing coverage for their employees, and $30.716m for individual policyholders.

Most of that $206m would have been spent at home due to the COVID restrictions that were in place at the time. This sum is thought to include VAT. Using the 12 percent rate prevailing at the time gives a figure of $24.72m, which is an admittedly crude estimation of the collective VAT burden that would have been reclaimed by reinsurers then. Under the current VAT rate, this would equate to $20.6m.

Both figures, though, give an indication of the total taxation/financial burden being transferred from insurers to patients/consumers due to the VAT treatment change. Mr Rolle said it was impossible to estimate how many employers and individuals may elect to drop private health coverage as a result, with much depending on how companies - already facing multiple other cost increases - react.

“We’re not able to assess that until the final changes are made to premiums,” the BAF chief said. “As it’s happening in all areas, consumers can certainly expect increases. It’s the cost of care that will increase as well as the premium. The cost of care increase, based on the cost of charges for services in addition to the VAT, will be borne directly by consumers. They will be expected to pay VAT on all the services they receive. It’s certainly significant for the consumer.”

Suggesting that tertiary-level patients may seek to escape higher medical bills by accessing treatment overseas “where the option does exist”, Mr Rolle said the Bahamian insurance industry has yet to decide whether to challenge the Ministry of Finance and Department of Inland Revenue’s new interpretation before the Tax Appeals Commission.

“I don’t know if there will be a formal appeal. Those discussions are still ongoing,” he added. “We will continue to dialogue with the Government. We will work with the [medical] providers such that we are ready for the transition as indicated.”

Tribune Business understands that doctors and other medical practitioners, as well as pharmacists, dentists and optometrists, are now scrambling to adjust their computer systems and business models in the two months remaining before the revised VAT treatment of insurance claims payouts takes effect.

From April 1 onwards they will be responsible for collecting and remitting this VAT to the Government, but were not involved in the talks with the insurance industry and are only now just being informed of the change. One medical source, speaking on condition of anonymity, said: “It’s going to put our administration to task because we have to follow it through and work it.

“It’s going to shift the burden to doctor’s offices, pharmacists and dentists’ offices to collect the VAT. The stakeholders are not all privy to this information. We found at late. We are learning about it and having discussions on it.”

Mr Rolle, meanwhile, refuted the Ministry of Finance’s suggestion that insurers and the BIA are seeking to spread unnecessary fear and alarm among consumers about the financial impact of the changed VAT treatment. “My on-the-record response to that is the industry is not seeking to cause fear or alarm,” he said. “The industry is simply seeking to provide clear information to our consumers.

“The Department of Inland Revenue and Ministry of Finance indicated to the industry what their expectations were, and in anticipation of the transition the industry is looking to inform its customers of the changes. There’s impact even at the smallest levels as it relates to changes in the interpretation of the Act. We want to make sure our consumers know they must pay the VAT.

“The industry is not politicising anything related to VAT or the treatment of VAT. We believe the public needs to be aware the change is coming in the near future, and the impact this will have on each of the consumers of medical services as well as each of the insurers in the industry. Based on the discussions with members of the BIA, all the insurers are expected to treat the changes in VAT in the same way.”

The Ministry of Finance, though, is arguing that it is “clearly against the VAT Act” for insurers to claim back the 10 percent levy on medical claims payouts - a practice allegedly costing the Public Treasury millions of dollars. It added that one audit of an unnamed health insurance provider in 2021 showed it had “received over $20m illegally” through this mechanism.

Its, and the Department of Inland Revenue’s position, is that VAT is payable on medical insurance claims payouts because these are being made on behalf of the end-user - the consuming patient - and thus should attract the tax. Health insurers are currently claiming this as ‘input’ VAT, offsetting it against their ‘output’ tax on premiums and effectively allowing the likes of Colina, Family Guardian and CG Atlantic to claim it back from the Government.

However, the BIA is arguing that the Ministry of Finance is wrong to treat the payment of clients’ medical expenses and the care received from providers as two separate services. Its case is that since health insurance and medical services are both VAT-able, health insurance claims should continue to be tax-deductible for health underwriters, otherwise the Government would be knowingly applying two layers of VAT.

One insurance source, though, speaking on condition of anonymity, said: “The Department of Inland Revenue has changed its interpretation of what the law is. It hasn’t changed the law. What they’re saying is the insurance companies are not the beneficiaries of the service and, as such, the insurance companies are not to claim back the VAT related to any payout. If the insurers are not the ones receiving the service, then the one doing so has to pay the VAT.”