The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government and insurance industry last night traded blows over fears that Bahamian healthcare costs will further increase due to a new VAT treatment set to take effect from April 1, 2023.

The row erupted after the Bahamas Insurance Association (BIA) issued a late Friday statement warning that medical bills and treatment costs for thousands of Bahamians will increase due to the Ministry of Finance’s decision to stop insurers recovering the 10 percent VAT paid on health insurance claims payments from the Government.

Such a move, the industry’s trade body warned, will likely make private healthcare less accessible - and increasingly unaffordable - for more Bahamians as they will now be responsible for paying VAT on top of their actual medical bill. However, this was disputed by the Ministry of Finance, which argued that the change’s impact on individual and group (employer) health insurance policies will be “insignificant”.

The ministry, in last night’s response to the BIA, said it was “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.

The Ministry of Finance and BIA also disputed the latter’s assertion that the Government has been less than transparent with both the Bahamian public and medical profession, both of which will be directly impacted by the changed VAT treatment, and failed to properly consult with them.

“In our most recent meeting with the Ministry of Finance and the Department of Inland Revenue, we asked whether the Government intended to make a public statement regarding its decision. We received a one-word response: ‘No’,” the BIA alleged.

The Ministry of Finance, in its riposte, attacked the insurance industry for releasing a statement it asserted “relies so little on the facts”, while accusing the sector of “misconstruing” the two sides’ negotiations and seeking to “politicise a technical issue”.

It alleged that the BIA and its health insurance members had admitted they were applying the incorrect VAT treatment to medical claims payments, and the Government had agreed to their request for a transition period lasting months to adjust to the correct method. The Ministry of Finance, adding that it thought an “amicable solution” had been reached, also accused insurers of seeking to “unnecessarily alarm consumers” about the resulting cost impact.

Nevertheless, the battle between industry and government has ignited at a time when, according to the Prime Minister himself on Saturday, the Princess Margaret Hospital (PMH) is in “truly crisis” along with the rest of the public healthcare system.

Any increase in private medical costs thus threatens to drive more persons, unable to afford healthcare coverage, into an already overburdened and strained public system. Such a move would also represent a further cost hike just when hundreds of Bahamian households and companies are grappling with the inflation-driven cost of living crisis.

Tribune Business revealed in May 2022 that the Government and health insurance industry were negotiating to resolve their differences over the VAT treatment of medical claims payouts. At present, insurers can deduct, or offset, the VAT portion of patient care bills submitted to them by doctors, hospitals and other medical facilities against what it pays to the Government from the 10 percent levy imposed on client premiums.

This practice, though, will end in two months’ time after the industry said it was told by the Department of Inland Revenue that it plans “to increase the VAT burden on medical, dental and vision” insurance from April 1, 2023. “Health insurance policies are taxable, and clients currently pay VAT on their premiums,” the BIA said.

“Like all other companies selling taxable products, insurance companies are currently able to recover VAT paid on health insurance claims and other inputs so that our clients’ VAT burden is only the VAT on their premiums. The Department of Inland Revenue intends to stop insurance companies from being able to recover the VAT paid on health insurance claims.

“This would mean that, in addition to continuing to pay VAT on their premiums, clients will now also be responsible for the VAT on the underlying medical service...... As an example, if the portion of a health insurance claim paid by the insurer is $5,000, the insurer currently pays VAT of $500 on that claim to the medical provider and recovers it from the Government. However, effective April 2023, the insured receiving the service would be responsible for paying the $500 to the medical provider.”

The Government’s position is that health insurance claims are being paid on behalf of the end-user, or consumer, and thus should be VAT-able with the 10 percent levy not recoverable by insurers such as Colina, Family Guardian and CG Atlantic. However, the industry is arguing that the Ministry of Finance is wrong to treat the payment of clients’ medical expenses and the treatment received as two separate services.

“The BIA has argued that health insurance is a means of financing medical care, and it is unreasonable and illogical to ignore the linkage between the two. As both health insurance and medical services are taxable, health insurance claims should continue to be tax-deductible for health insurers, otherwise the Government would be knowingly applying two layers of VAT to health insurance. The Government has rejected our position,” the BIA added.

“The Department of Inland Revenue’s new VAT rules will harm local healthcare providers. The rule change increases the cost of using health insurance to access services from Bahamian providers. Insureds can escape this additional tax burden by receiving treatment overseas. This will reduce the clientele of Bahamian healthcare providers and increase the drain on our foreign exchange reserves.”

The Ministry of Finance, in its reply, argued that Bahamian health insurers have been applying an incorrect VAT treatment to claims payouts for the past eight years ever since the tax was introduced on New Year’s Day 2015. “For transparency purposes, the Department of Inland Revenue (DIR) in 2021, while conducting an audit of a health insurance company discovered the incorrect treatment of VAT paid to health providers,” the ministry said.

“Audit results revealed that the company claimed back the VAT as input VAT, although it was not a beneficiary of the service provided. This is clearly against the VAT Act. This company subsequently benefited by receiving over $20m illegally, that should have been paid to the Government.”

After finding similar issues during a VAT audit at another health insurer, the Ministry of Finance said it realised this might be an industry-wide issue. Talks were initiated between the BIA and its members on one side, and the Government - including the Prime Minister and Michael Halkitis, minister of economic affairs - to find a solution.

“In these discussions, the BIA acknowledged that health insurers were applying the incorrect VAT treatment and petitioned the Government for a transition period to apply the correct treatment. This offer was formally made to the Government by the BIA, and was formally accepted by the Government,” the Ministry of Finance said. “The attempt by the BIA to imply that this was a unilateral decision by the Government is again not factual.”

Simon Wilson, the Ministry of Finance’s financial secretary, last night told Tribune Business that the VAT Act simply does not allow health insurers to treat VAT payable on claims payments as an ‘input’ and recover this from the Government. “The issue is the ability of insurance companies to charge or recover ‘input’ VAT from health insurance claims. The issue is the law doesn’t allow that,” he said.

“The choice we have as a Ministry of Finance, as a government, was to allow this to continue or move the practice to be consistent with the law. That’s the choice we had. We looked around, did some comparisons and our advice - and advice from external persons - was he practice should be consistent with the law.

“The issue the industry identified was that they needed a transition. We gave them a transition. That goes up until April. The transition went almost 12 months since we identified the issue, and we thought we’d come to an agreement.” Mr Wilson said the VAT Act is aligned with “international best practice” on the issue, and disputed fears that the changed treatment will increase medical bills, reduce private healthcare’s affordability and hurt the medical profession.

“I don’t know if that’s true,” he argued. “The reality is health insurance costs have bee rising by double digits prior to this change. I don’t think this is going to accelerate the rate of health insurance costs. Health insurance is a very competitive market. We don’t have a monopoly. We have several providers looking for market share. Certainly, on group insurance it’s very competitive, so I don’t imagine that dynamic changing, but we have to monitor it.”

Mr Wilson also voiced scepticism that increasing the VAT burden will drive Bahamians to seek medical care overseas as this will be offset by increased travel costs. “The rate of VAT on health services is not changing; there would be no double layering of taxes,” the Ministry of Finance said.

“What is changing is the treatment of this VAT paid by the health insurance company. This would be no different from treatment of VAT paid on insurance claims by general insurers as of April 1, 2023. Different companies will deal with these adjustments in different ways. However, the health insurance market in The Bahamas is very competitive. The BIA is seeking to unnecessarily alarm consumers about this adjustment, and this is unfortunate.”

The Ministry of Finance also rejected the BIA’s assertion that it had adopted an “unorthodox consultation process”, and that the changed VAT treatment was “presented as a ‘fait accompli’ and our concerns and recommendations have largely been ignored”. The industry also accused the Government of failing to consult with, and notify, the public and healthcare providers of the change.

Mr Wilson, in response, said the issue did not rise to the level of a policy change or alteration to the VAT Act itself - events that would require advance consultation. He presented it as a “technical matter in terms of interpretation of the law” confined to one group of VAT taxpayers, which was typical of issues that the Ministry of Finance deals with regularly and does not require “any fanfare”.