In the face of rising health insurance premiums, more people than ever are questioning whether forking out for private cover is worth it.
According to Roy Morgan research, only 57 per cent of Australians now consider private insurance “essential” – down nine per cent from four years ago.
Meanwhile, 16 per cent of people now say they struggle to see the value in continuing to pay their premiums. That’s five per cent more than in 2014.
The feeling that we’re not seeing value for money in private health insurance is understandable, says Dr Sophie Lewis at the Centre for Social Research in Health at the University of NSW.
“Our publicly-funded universal healthcare system, Medicare, is one of the best healthcare systems in the world. And in an emergency, you’re likely to end up in the public system regardless of whether or not you have private health insurance,” she says.
You can forget horror stories of remaining on waiting lists for surgery.
According to official statistics, just 1.7 per cent of people wait more than a year for elective surgery. While for a more pressing procedure such as emergency radiotherapy, 95 per cent begin treatment within a day of being admitted to hospital.
No wonder Roy Morgan also found that 44 per cent of Australians – including some who thought they were receiving value – were confused about what it was they were paying for.
Choice, comfort and control
What private health insurance – or at least private hospital cover – can provide is some level of control.
This comes in the form of access to a private hospital or a private room in a public hospital (although neither is necessarily guaranteed), free rides in ambulances in States where you wouldn’t otherwise have it (i.e. everywhere except Tasmania and Queensland) and some say in which medical professional treats you.
Choosing a doctor is a decisive factor for many mothers-to-be, says financial adviser and owner of The Fiscal Mum, Rebecca Maher.
“The public system provides great maternity care, there’s no doubt about that,” says Maher. “But when you’re privately insured you have a lot more choice over your birthing options.”
“This includes getting to choose your obstetrician and having them see you through your pregnancy and right up to the birth. That’s very important for some women.”
Getting access to the specialist you’d prefer can also make private health insurance attractive to older people or those with a chronic illness or injury, who value continuity of care from a particular doctor.
Increasingly, however, our power of choice is being diminished as some health insurers require customers to use their preferred providers to receive the maximum financial benefit.
The Medicare Levy Surcharge
The federal government actually wants you to take out private insurance, especially if you earn a decent income.
That’s why it uses a carrot and stick approach to encourage people to take out private health – and to take it out as early in their lives as possible.
The carrot comes in the guise of the Private Healthcare Rebate, which potentially offers a percentage of your premium back depending on your age, relationship status and income. Meanwhile, the stick takes two forms:
- The Medicare Levy Surcharge, which effectively makes you pay extra tax if you earn a decent income and don’t have private health insurance; and
- Lifetime Health Cover, which adds an extra 2 per cent to your premium every year after 30 that you don’t have private hospital cover for a maximum of 10 years.
The government wants to push us into private cover when we’re still young and healthy. That way, it can encourage insurers to keep premiums lower – even for those who are older and unhealthy and much more likely to use their policy.
“Health insurance is community rated, meaning that every person is entitled to buy the same health insurance product for the same price as any other person (except where Lifetime Health Cover loading applies),” says Dr Lewis.
“So a health fund can’t charge one person more or refuse to cover them based on, for example, what health conditions they have.”
There are thresholds for the Medicare Levy Surcharge and Private Healthcare Rebate for 2018/2019. And remember, these rates are calculated on all your income – including fringe benefits and rental income negatively geared – not your taxable income.
|Income Singles ($)
|Income Families ($)
|Private healthcare rebate (percentage of premium)|
|70 and over||33.887%||25.415%||16.943%||NIL|
|Medicare Surcharge Levy|
Crunching the numbers
The combination of these measures means there comes a point where it is cheaper to take out private health cover than not to.
Most health insurers realise this and offer “basic” hospital packages which cover essential hospital treatment but not more expensive procedures. These start from less than $200 a month even with a zero rebate applied.
For instance, a high income-earning family with $350,000 would pay a Medicare Levy Surcharge of $5,250 a year, or $437.50 a month – meaning they’d clearly be better off financially with private health insurance.
In other words, by taking out insurance they’re essentially receiving something for nothing.
Alternatively, a mid-income family earning $150,000 a year would pay no Medicare Surcharge Levy and therefore would feel every cent they pay for private health insurance. So the financial case for private health insurance isn’t so obvious here.
Just one word of warning – if your ambition is to actually receive something from your private health insurance beyond saving money, be careful about choosing your policy based only on price.
Many are known as “junk” insurance policies, offering little in the way of benefit in return for an effective tax break.
Hospital v. extras
What also isn’t as obvious is the financial case for extras cover.
This is an amount you pay to get money back each time you use non-hospital related services such as physiotherapy, dental and podiatry.
It’s the reason why those reading glasses seem like they keep coming for free each year and why you get money back on the kids’ orthodontist bill.
There are two reasons why extras is a little murkier. First, extras cover isn’t factored into the Private Healthcare Rebate or Lifetime Health Cover. The government doesn’t care whether you take it out or not, and it won’t make any difference to the extra tax you pay or the rebate you receive.
Second, extras cover isn’t really insurance at all. You’re not paying to protect yourself against something happening. Instead, you pay an upfront fee to receive a discounted rate on certain health services. It’s a bit like paying for a bunch of discount coupons and then hoping you actually get value out of them over the year.
Some people manage to get value from their extras cover, especially older Australians (who tend to make the most extras claims) and families (children are included for free and some funds offer no gap coverage for kids on dental or other services).
But even then, Maher says you need to do a proper cost-benefit analysis.
“When you have a young family there’s a natural inclination to want to take out the most cover and the best cover you can afford and it can give you peace of mind knowing that you’re insured.”
“But you really need to weigh up private health insurance as a financial decision. There’s no reason you have to tax out extras cover when you take out hospital cover and vice-versa.”
Putting health insurance in context
When it comes to looking at private health insurance in the context of your monthly or weekly budget Maher cautions against falling into the trap of treating their private health insurance as though it covers their whole health budget.
“Yours and your family’s health really is the most important expense you face but a lot of things go into keeping you healthy, not just private health insurance,” she explains.
“Staying on top of your finances means making sure you budget for everything, including preventative health measures.”
Is private health insurance right for you?
If you’re considering whether it’s worth taking out private health insurance or keeping your current policy, both Maher and Lewis recommend there are a number of things you should always do.
- Work out your tax liability. Figure out what the Medicare Levy Surcharge based on your – and your partner’s – likely income by applying the table above.
- Work out what you need. What are you buying for? Make a separate decision for both hospital and extras. If you already have extras cover ask for a claims statement so you can see how much you really use. Would you be better off putting money aside each month to cover these medical treatments?
- Compare policies. Avoid using comparison sites which receive a commission for signing you up and are selective about the policies they show. Instead, try the Australian government’s website privatehealth.com.au which offers unbiased information for free. Choice also provides unbiased comparisons.
- Stay vigilant. Review your policy every year, to ensure it’s the best to meet your individual needs and circumstances.