The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

THE changed VAT treatment on health insurance claims payouts could further drain The Bahamas’ foreign reserves by driving patients to seek care outside the country, a senior executive warned yesterday.

Julian Rolle, BAF Financial’s managing director, told a Rotary West of Nassau luncheon that Bahamians with private health insurance may opt to have surgeries and more expensive treatments performed outside this nation given that from April 1, 2023, they will become responsible for paying 100 percent of the VAT due on their care costs.

Presently, persons with private medical insurance only pay VAT on the co-pay or deductible, which is typically 20 percent of the care or medication costs. However, the Ministry of Finance and Department of Inland Revenue are altering the VAT treatment of health insurance claims payouts such that insurers will no longer be able to recover the 10 percent levy by claiming it as an ‘input’, thus enabling them to net it off against the output VAT paid to the Government.

In practice, patients - as the end-consumer - will now also become responsible for paying VAT on the 80 percent share of medical costs paid by insurers. The latter will almost certainly pass this sum on to consumers, with the end result being that the proportion of medical costs borne by patients will now increase.

Mr Rolle explained that shifting the VAT burden from health insurer to consumer will inevitably increase medical cost expenses for the latter. He gave the example of a patient purchasing $100 worth of medicines, where private insurance covers 80 percent of the cost and the individual is responsible for the $20 co-pay/deductible balance.

Only the latter presently attracts 10 percent VAT, costing the patient some $2 in taxes and 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.

Mr Rolle said: “If the cost goes up by 36 percent on rent, or school fees, I’m sure no one in this room would like it. I certainly don’t want my medication to increase by 36 percent. The same rules apply to bigger numbers. If the service costs you $10,000 because you’re in the hospital, now that’s going to cost you $13,600.

“As a part of the education campaign and the BIA (Bahamas Insurance Association), we can include numerous examples on our website to make sure that before they educate the public, the DIR’s (Department of Inland Revenue) new VAT rules will cause disruption to local healthcare providers as well.

“The new interpretation of the rules increases the cost of using health insurance to access services from Bahamian providers. The insureds can escape this additional tax by opting to receive treatment overseas. This will reduce the clientele of local Bahamian healthcare providers and increase the drain on our foreign exchange reserves as well.” However, the extra travel and accommodation costs involved will still likely deter some from seeking overseas care.

The revised VAT treatment will also require doctors, other medical practitioners and pharmacies to adjust their accounting and point of sales systems to collect the tax and remit it to the Government now that the insurers will no longer be able to claim it as an input expense.

“That means now, when you walk into your pharmacy, they need to be charging you differently. Everybody’s got a computer system. All of these need to be changed,” Mr Rolle said. “When that happens over at Doctor’s Hospital and at your physician, all of those changes will need to take place.

“These changes and systems is another thing that will undoubtedly increase the cost of services. What was once a simple process of charging a co-pay to someone with insurance will now involve charging VAT on services, which in some cases have yet to even be determined.”

Mr Rolle continued: “The BIA can state insurance companies did not change the policy on paying VAT. The Department of Inland Revenue indicated insurance companies were not the beneficiary of services.

“One would think that this is somebody changing the profit of the insurance company. However, this is another math problem. Let’s look at the math on this one: The VAT that the insurance company collects from me every day or every month hasn’t changed. My premium is $300. It was always $300, and I’ve always paid $30 of VAT. The insurance company will pay that same $30 over to the Government.

“The claim that is paid by the insurance company is changed due to the change in the interpretation of the law. So what does that mean? The insurance company would have paid $8 in VAT on my medication. They would have deducted that payment from the $30 that is collected on my premium, and the insurance company would have then paid $22 directly to the government and given the $8 over to the pharmacy for them to forward it to the Government.

“So the outflow from the insurance company hasn’t changed. We pay the Government $30. Nothing has changed, nothing has moved. The only thing here that’s really increased is the Government will now get $30 directly from the insurance company and now they will also get $8 from the patient.”

The Ministry of Finance is arguing that it is “clearly against the VAT Act” for insurers to claim back the 10 percent levy on medical claims payouts by netting it off against the VAT paid on the premium - 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.

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.