The cost of private health insurance in Australia keeps on rising. After housing, food and motor vehicle expenses, health insurance typically comes up as the next big-ticket item in most household budgets. So it’s worth asking the question – do we need it?
Private Health insurance is likely to be worth having if:
- You are over age 65 – the statistics say you’re far more likely to need medical care as you get older.
- Your income is at a level where the Medicare surcharge will apply.
- You’re planning on starting a family and would like greater choice around care and hospital accommodation.
- You have significant ongoing medical issues that won’t be covered under the public system.
In Australia we all contribute to a form of health insurance – Medicare, which for the most part is very good. Given the existence of Medicare, why pay for a second layer of health insurance?
Before we get too much further, let’s define some basic elements of private health insurance.
There are two types of private health cover, which may be bundled together into a single policy:
- Hospital cover – the name says it all. This is cover for expenses like hospital accommodation, operating theatre fees, and treatment whilst in hospital.
- Extras – physiotherapy, dental, optical etc. Things not covered under Medicare in most cases.
Private health insurance potentially gives you more choice as to the doctor and hospital that you wish to be treated at, and may help get certain procedures done more quickly than would be the case if going through Medicare.
The frustration often felt with private health insurance however, is that despite all the money that you pay in premiums, you are typically left with a “gap” payment, representing the difference between what the procedure costs, and what the health insurer is willing to pay. This gap can be thousands of dollars. Yet often, if you go through the Medicare system instead for the same treatment, there is no gap.
Do I Need Private Health Insurance in Australia?
We are fortunate in Australia to have a good quality public health system, funded by Medicare. If you have a medical emergency, you will get treated, and you won’t be made bankrupt in the process, as can happen in other countries.
So why have private health insurance in Australia then?
If you’re planning on having children and would like choice around obstetrics care and the higher level of comfort offered by private hospitals, then the right private health insurance policy may prove worthwhile.
Outside of childbirth, most young people only end up in hospital due to an accident. And these cases are typically handled in a public hospital and can be covered by Medicare.
Your chances of needing hospital care rise significantly as you get beyond age 50 though.
Private health insurance can also be very helpful later in life to avoid long waits for procedures like hip and knee replacement surgeries.
Consumer advocate CHOICE have produced a helpful quiz which you can take here to help you decide whether you need cover.
Do I need to have private health insurance to avoid tax penalties?
For those earning more than $90,000 as a single, or $180,000 for families (plus $1,500 for each child after the first), Medicare surcharge will apply if you don’t hold private hospital insurance.
The level of the surcharge ranges from 1% of income to 1.5% of income. It is worth noting that the definition of income includes your superannuation contributions, and any fringe benefits.
So a household earning say $200,000 would pay $2,000 in Medicare surcharge if they don’t hold private hospital cover. The hope of the policy makers, of course, is that this will drive these people to purchase private hospital cover, taking some pressure off the public system.
This Medicare surcharge is a key reason why private health insurance will be taken out by many Australians. There’s a sense that paying this levy is just more tax, whereas if you spend a similar amount on private health insurance, you at least have the benefit of care provided through the private system.
The complicating factor here though is the gap payments. Even if the cost of cover matches the amount that you would have paid in Medicare surcharge, if going through the private system results in significant gap payments that wouldn’t have existed in the public system, then it may be that you’re still worse off having private cover.
It’s important to note that to avoid Medicare surcharge you only need Hospital cover, not Extras.
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What is the Lifetime Health Cover loading?
As a very broad principal, when it comes to health insurance, young people subsidise older people. It’s important then to have young, healthy people in the system. If the only people in the private health insurance pool were over age 60, the cost of cover would become considerably more unaffordable than it is today.
So to encourage young people to take up cover, there is the Lifetime Health Cover loading.
If you wait until after age 30 to take up private health cover, your premiums will have an extra 2% loading put on top of them for each year you have delayed.
So if you don’t take out cover until you are 35, you’ll pay 10% more than your 35 year old friend who had cover in place prior to 30.
Hold off until age 65, and you’ll pay the maximum loading of 70%.
There is some relief though. After you’ve paid the loading for 10 years, it is removed.
Most analysis on the financial impact of this loading is that, assuming you make no claims on the insurance, you’d be better off financially not paying for insurance, and just coping the loading later in life.
The wrinkle in these numbers though is they assume you haven’t needed the cover. But of course the whole purpose of insurance is to protect you from financial catastrophe. In the period that you didn’t have cover, you also didn’t have the protection the private health insurance would have provided you.
Is it worth paying for Private Health Insurance?
The million dollar question. And of course there is no single right answer.
The general principles are:
- Private Health insurance is likely to be of more value the older that you are.
- If you’re on an income level that means you would be liable for the Medicare Surcharge, then it is more likely Private Health insurance (Hospital cover only possibly) is worthwhile for you.
- If you’re planning on starting a family and would like greater choice around care and hospital accommodation, then Private Health insurance may be of value.
- If you have significant ongoing medical issues that won’t be covered under the public system, then insurance may be worthwhile.
If you were disciplined enough to put the amount you would have paid in premiums away into a bank account or even better an investment that generated better returns than cash, then it is highly likely you would be better off financially in the long run. You could even take out private cover at age 65, and cop the Lifetime Health Care loading, which only applies for 10 years anyway, despite its name.
But the challenge is, will you be disciplined enough to keep making those contributions, and not dip in to pay off the mortgage or something similar?
Also, holding insurance does provide peace of mind. We’re not to know if or when a major accident or illness might befall us. Most emergencies will be well provided for via Medicare, but there is definite value to your mental health in knowing that if something crops up where a long wait is in prospect within the public system, you could opt to go private without breaking the bank.
A final note – as mentioned at the beginning, Private Health insurance has two components – Hospital and Extras. To avoid both the Medicare Surcharge and the Lifetime Health Cover loading, you need only have Hospital cover. This might be helpful in keeping your costs down.
The idea of insurance is that it protects you from disaster. In my family we’ve been fortunate that thus far we haven’t faced a medical disaster. Most people will be in the same boat. But for those unlucky enough to face some really terrible medical situation, they will be paid out far more than they ever put in. They will use the surplus money from the rest of us. And as the old saying goes “there but for the grace of god go I”.