Critics say Australia's private health insurance system is broken. Can We Fix It?

It’s a question many Australians are asking when confronted with their private health insurance payments these days: Why are the premiums so high? Billy Explores knows this pain too, but he’s here to try to help you understand it, and why you should always compare health insurance providers.

Critics are saying Australia’s private health insurance system is broken and the reason is very complex, but many in the health sector put it down to basic maths. There are too many older patients using the Medicare and hospital system (even under a private health policy), that is expensive older patients that use more resources. Unfortunately there are not enough young people to counteract this.

During the pandemic, the situation actually worsened. Many older patients took up private health insurance policies, but younger people were questioning its overall value.

Many in the health sector believe serious reforms are required to encourage more people, in particular young people, taking out private health insurance.

The three schemes are the private health insurance rebate, lifetime health cover loading, and Medicare levy surcharge. 

They are meant to encourage Aussies who can afford private health cover to take out a health insurance policy and take pressure off the public system. However, over time, people who say the system needs reforms tell us a combination of low wages growth, health insurance premium increases, and social changes are locking young people out of private health insurance, instead of encouraging them to take out a health insurance policy.

So, let’s find out a little more about what other experts in Health Insurance have to say about it (we all know Billy Explores is the expert in comparing health insurance policies and getting the best deal for you).

The Public-Private divide

With COVID-19 surgery restrictions during the pandemic, this led to a massive increase in elective surgery public hospital waiting lists.

Rachel David, chief executive of peak body Private Healthcare Australia says that nearly two-thirds of elective surgeries are done in a private hospital under private health insurance.

“If people are in need of essential non-emergency surgery like a hip replacement and they choose to get it in the private sector, it will free up space on public waiting lists,” she said.

Medicare Levy Surcharge

Most Aussies know the Medicare Levy Surcharge from their tax return — but it still is useful to understand!

Aussies that don’t have private health insurance and earn more than $90,000 a year, or $180,000 a household, have 1% to 1.5% levy on their annual tax bill. So, if you do the maths, that can mean an extra $900 and through to $2,extra a year in additional tax you have to pay just for not having private health insurance.

It’s called Medicare levy surcharge, because funds collected are reinvested into the public system to cover the uninsured group.

Rachel David said when the surcharge was introduced two decades ago, it was designed to encourage those in the top tax bracket to take up health insurance.

But according to the Australian Medical Association, government failure to have the tax threshold keep pace with wages means the surcharge now hits those from the middle tax bracket up.

“The Medicare levy surcharge now applies at a more average wage than it did when it At the same time, health insurance premiums have been rising well above inflation.

A basic policy can set a single person back about $1,000 a year, with more costly policies for households.

Consumer Health Forum chief executive Leanne Wells said many consumers did the sums and realised it was cheaper to pay the surcharge, rather than than actually taking out health insurance.

Or failing that, younger people took out a basic or bronze-level policy to avoid the tax, but still relied on the public hospital system for actual treatment.

“It’s a bit problematic,” Ms Wells said.

Ms David said it was definitely time for the income threshold to be reviewed.

“Raising the income threshold is a good idea, but also probably considering putting the [rate] up for those people that are very high income earners.”

Private Health Insurance Rebate

It might not seem like it on face value, but most Australians who take out private health actually get a federal government rebate on their premiums. It’s automatically calculated by insurers when a customer takes out cover. These rates range from 8 per cent to 33 per cent, depending on age and income.

However critics of these say the way these rates are structured is incentivising the wrong groups and not helping young people enter the market. For example, people aged over 70 receive up to 33 per cent off their health insurance premiums. But Aussies under 65 get a maximum of 25 per cent off, and much less if they’re on higher incomes.

Private Healthcare Australia said the government should restore an earlier system, introduced by the Howard government in 1999, where everyone got a maximum of 30 per cent. It was scrapped by the Gillard government in 2012 in favour of means testing.

The Consumer Health Forum disagreed, arguing that older people should get a bigger discount, as they are the ones who need health insurance the most.

“We think on the whole, the tiering is good,” Ms Wells said.

The AMA argues that government tinkering with thresholds over time has forced younger age groups out of private health insurance.

“A good thing the government could do to help Australians afford private health insurance is to lift that levy back up to 30 per cent where it first started,” Dr Khorshid said.

Lifetime Health Cover Loading

This is a sneaky one if you don’t look out for it and many Aussies are caught out later in life! Those who haven’t taken out private health by the age of 31 must pay a 2 per cent loading on premiums once they sign up.

It adds more every year the persona wasn’t covered after 30 years of age, for up to 10 years.

So if a private health insurance customer took out a health insurance policy at age 35 they would have to pay a 2 per cent loading five times over, or 10 per cent.

It was designed to encourage people to take up health insurance early in their life, but since this was introduced two decades ago, industry change advocate say a number of factors have significantly impacted and change in Australia.

The first is the rising cost of health insurance premiums so steep advocates fear it actually locks young people out for longer, or entirely. Also, advocacy groups say some people in their fifties taking out cover for the first time which means they’ll take the hit of paying the loading for a decade, just to set themselves up for retirement when they’d need private health insurance cover more. 

AMA president Dr Omar Khorshid said the loading needed to be adapted to accommodate low wages growth and its effect on younger cohorts.

“We think that there’s a good argument for this lifetime health cover threshold to be raised to 35 or maybe even 40 so that it’s not a disincentive,” he said.

So Can We Actually Fix The Private Health Insurance System?

Well, as Billy Explores says, there is one way to fix a private health insurance policy that no longer serves its purpose and that’s comparing health insurance providers through Billy Explores! But let’s still hear what the experts have to say.

Leanne Wells from the Consumer Health Forum says, when it comes to private health insurance reform, the biggest challenge is getting anyone to agree.

“When there’s a lack of consensus, it makes it incredibly hard for governments to take an agenda forward,” she said.

How To Compare Health Insurance Providers?

So we’ve heard the experts talk about private health insurance and what needs to be done to fix the medicare system. Well, as we said earlier, the one way to ensure you do get the best value health insurance for your needs is to compare health insurance providers through Billy Explores. Explore potential savings and save time and effort and see if you can find a better value health insurance policy for your needs today.