About this time every year we start getting bombarded with marketing from private health insurers and their associated agents… “Are you turning 30? Did you know there’s stuff you could be claiming? Don’t get slammed with extra tax! Lock in now to beat the price increase!” The problem with researching private health insurance is that most information providers are biased. Private health insurance comparison tools get a commission when you sign up through them, so they’re unlikely to act in your best interests. The government doesn’t want to pay for your medical costs, so they’re not likely to recommend the public health system either. Luckily, I don’t receive any commissions either way, so I’ll try to demystify the overly complex world of private health insurance to help you make the right decision.
What does private health insurance actually do?
Before we get into too much analysis, it’s worth thinking about what private health insurance actually does. The answer to that really depends on which of the 3 types of policies you have:
- Hospital – this will cover some of the costs incurred if someone covered under the policy ends up in a private hospital.
- Ancillary/Extras – this will only cover a portion of the various medical costs which Medicare doesn’t cover (e.g. dental, orthodontic, optical, chiro, physio, podiatry, gym membership, pregnancy services, etc). Often there will be limits in place so that the private health insurer will only pay a portion of a specific medical service. There may also be a yearly limit to a certain type of medical services as well.
- Combined – this will cover for both hospital and ancillary/extras.
In addition to these things, under a hospital or combined policy you have the option to choose your doctor/surgeon. There are also often substantially shorter waiting times in a private hospital compared to the public health system, which can be priceless if the waiting patient is in pain or discomfort.
Are all private health insurance providers the same?
Not at all. Every private health insurance provider will cover different things to different extents. Some are run for profit, whereas some are non-profit organisations which cater to specific communities. Most private health insurance providers will offer different packages targeted at different phases of life with different inclusions. If you’re considering taking out a policy, think about the likelihood of you claiming the various types of medical services and pick an insurer that provides enough cover for the relevant areas.
Disadvantages of private health insurance
The cost – it’s not cheap at all. The most basic combined private health insurance cover for a single person starts from about $80 per month. For a family this is about $200 per month. For some of the top private health insurance packages a family could be paying around $500 per month.
Additionally, there are often waiting times on claiming some services when you join a private health fund. Some of the bigger items, for example, might need you to be a member for 1 or 2 years before you can actually claim for them. This is to ensure the private health fund makes some money from you before they need to pay out anything on your behalf.
Why not just rely on the public health system?
It’s true that many people choose to rely on the public health system. Others simply can’t afford the private health system. Either way, those who rely on the public health system will normally be able to access all public hospital treatments free of charge. Even still, there’s a few reasons why it’s not always great to rely on the public health system:
- Extras aren’t included – although treatments in a public hospital are generally free, medical services provided by dentists, optometrists, physios, etc. will be charged in full to the patient.
- Waiting times – if you need surgery under the public health system, you’re added to a waiting list which is basically prioritised according to who needs it most. I.e. if your appendix explodes, you will likely receive surgery quite promptly. If you need elective surgery, you may be waiting a couple of years. By elective surgery, I’m not referring to purely cosmetic procedures like a nose job. A knee reconstruction, for example, would be considered elective surgery. Someone with a structurally unstable knee is unlikely to die because of it, however they will likely be in a lot of pain. Under the public health system they need to wait their turn, and it will likely be a long time.
- Medicare Levy Surcharge – I’ll discuss this in more detail further on, but in a nutshell, higher income earners who choose to rely on the public health system will be financially penalised for doing so.
Will I cop a big tax bill if I don’t have private health insurance?
The short answer is, it depends. The reality is that the bombardment of private health insurance marketing never takes the time to explain this. It’s impossible to properly answer this question without providing a background on two very confusingly named but actually different taxes, the Medicare Levy and the Medicare Levy Surcharge.
The Medicare Levy is a tax which shows up separately on your tax assessment each year. It’s essentially a tax that’s imposed on individuals to pay for the public health system. This is calculated at 2% of your adjusted taxable income every year. So, whether you earn $50K or $500K per year, the Medicare Levy will still be calculated at a flat rate of 2%. Although there are a few exclusions (e.g. defence force workers or very low income earners), the vast majority of working Australians will pay the Medicare Levy each year, regardless of whether they have private health insurance or not.
In contrast, the Medicare Levy Surcharge is effectively a financial penalty on higher income earners who choose to rely on the public health system. It’s only paid by those who earn over a certain amount ($90K for single people and $180K combined for couples) and don’t have a private health insurance policy that provides hospital cover (i.e. ancillary/extras cover won’t exempt you from this surcharge). The surcharge starts at 1% of your adjusted taxable income and increases to a maximum of 1.5% if your income is high enough. This means that a couple without private health insurance whose combined income is more than $180K per year will pay a minimum Medicare Levy Surcharge of $1,800 every year. By taking out a private health insurance policy which includes hospital cover, they can avoid this entirely.
So, to answer the original question, if your adjusted taxable income is less than $90K p.a. for single people or $180K for couples, there won’t be an immediate financial penalty for not having private health insurance. If your adjusted taxable income exceeds these figures and you choose not to have a private health insurance policy which includes hospital cover, you will likely have a tax bill each year.
What’s the significance of turning 30?
There is one further financial disincentive associated with not maintaining a private health insurance policy that includes hospital cover. It’s called the Lifetime Health Cover Loading. The rationale behind it is that generally people aged under 30 don’t have too many health issues, whereas people toward the end of their lives have a lot of health issues. Those with more health issues are likely to spend more time in hospital, and as a result rack up larger hospital bills. So, it makes sense then, that private health insurance will generally be more valuable to you towards the end of your life than the start of it. To stop you taking out your first private health insurance policy at the age of 90, the Lifetime Health Cover Loading discourages relying on the public health system after the age of 30.
Under the Lifetime Health Cover Loading, for every year after 30 that you don’t have private health insurance, you’ll have to pay an extra 2% on the private health insurance premium if you take it out later on. For example, a 40-year-old who takes out private health insurance for the first time will pay an extra 20% on their premium (i.e. 2% x 10 years) compared to someone who had a policy at 30. Likewise, a 60-year-old who takes out private health insurance for the first time will pay an extra 60% on their premium (i.e. 2% x 30 years) compared to someone who had a policy at 30.
Interestingly, there’s a couple of misconceptions about the Lifetime Health Cover Loading. Firstly, it only applies to those who don’t take out a private health insurance policy in the financial year they turn 31, not their 30th birthday. Also, despite what the name may suggest, the Lifetime Health Cover Loading actually isn’t payable for a lifetime – it’s only payable for the first 10 years of your private health insurance policy.
So, is private health insurance worth it?
There’s certainly some benefit in maintaining a private health insurance policy which includes hospital cover for pretty much everyone. The question really is, do the benefits outweigh the cost? I’d suggest that anyone earning in excess of the Medicare Levy Surcharge threshold will be better off with a private health insurance policy. I’d also suggest that, it probably isn’t worthwhile for healthy individuals aged under 31 whose adjusted taxable income is less than the Medicare Levy Surcharge threshold. For everyone else, it’s a bit of grey area – they need to consider their age, health, personal income, risk tolerance and then make the decision they feel most comfortable with.
Note – for transparency purposes, the author of this article did take out a basic private health insurance combined policy in the year he turned 31, after a long internal debate.
