Health insurance – to cover or not to cover?

Private health insurance. It can be a minefield to navigate and a big decision for many people. Hospital, extras or both? Which fund? What do all the rebates, thresholds and surcharges mean? Here we look at what the future holds for the industry, recent legislative changes, and how you can make the most out of this important investment into health and wellbeing.

A question of money?

Jean is 56, single, and has limited private health cover. She has always enjoyed good health, pays special attention to her fitness and prides herself on rarely needing to see a doctor. However, in the past year Jean’s teeth have been causing her problems and one of her knees needs to be replaced following years of running, limiting her active lifestyle.

Cost does tend to be the biggest factor for most people considering taking out private health insurance, and according to the National Health Survey 58 per cent of Australians who don’t have cover say it’s because they can’t afford it.¹ However, more than 57 per cent of the population aged 18 or over have still chosen to take out private health insurance of some kind.² More than 51 per cent of those people cited ‘security, protection and peace of mind’ as their primary reason for having private health insurance, followed by ‘allows treatment as private patient in hospital’ (28.5 per cent). ³ Unfortunately, Jean suddenly discovered both of those reasons applied to her situation. She has received quotes for major dental work that run into thousands of dollars, much of which her health insurance won’t cover. Her limited health cover also means she faces a long wait before she is able to have the knee surgery.

An unsustainable model

Driven by an ageing population and increasingly expensive healthcare products and services, in less than four decades a projected 46 per cent of all Australian government spending will be on health and ageing⁴, meaning health inflation is rising consistently faster than the rest of the economy. And annual private health insurance premium increases, which are controlled by the Australian government, have failed to keep pace with health inflation over the past seven years.

The recent National Commission of Audit acknowledged this problem, saying, ‘Health care spending represents the Commonwealth’s single largest long-run fiscal challenge, with expenditure on all major health programs expected to grow strongly to 2023-24 and beyond. At a practical level, increased health spending reduces resources for other key areas.’ ⁵

The Commission also concluded that significant opportunities exist to improve the operation of Australia’s private health insurance system, which could help rein in health spending.

Understanding recent changes

One thing that does help with the rising cost of health insurance is the Australian Government rebate on Private Health Insurance, though that assistance has been whittled away in recent years. On 1 July 2012 this rebate became income tested, meaning it is affected by a variety of factors—including a person’s age, income and the number of children covered under the policy. At that time, though, the rebate increased by the same proportion as the price of the cover.

However, on 1 April 2014 new calculations were introduced. The rebate is now linked to the rate of inflation and the industry average price increase, rather than being a fixed percentage. This change applies to all Australian health funds, and means the value of the rebate will actually decrease over time. A person’s rebate entitlement will also continue to be based on their age and income.

The government recently released the updated private health insurance rebate and Medicare levy surcharge income thresholds, which will take effect as of 1 July 2014. However, as part of the recently released federal budget, the government has proposed freezing both the income thresholds and rebate percentages for three years from 1 July 2015⁷ — meaning income thresholds will likely be adjusted again on 1 July 2015 but then fixed for three years, and rebate percentages adjusted on 1 April 2015 and then also fixed for three years.

Stay tuned, though—as with many budget measures, these changes are yet to receive support from the Senate.

Knowledge is power

As this shows, private health insurance can get complicated. Here are some tips to get the most out of health insurance:

• Review your policy. If you’ve had the same policy for many years, chances are you’re paying for things you don’t need. You might find you’re still covered for pregnancy when your kids have all moved out of home! There are also some legacy health covers still in the market that may mean older people in particular can be paying more than they need to—for example, they may be charged a daily levy for each night spent in hospital on top of their excess.
• Make sure you’ve registered the correct income threshold. To receive the maximum government rebate on private health insurance, you need to nominate an income threshold, or tier, based on the amount you earn. Avoid a nasty surprise at tax time by ensuring your selected tier reflects your current income. You can make changes to your tier at any time during the year if your circumstances change.
• Check your ambulance cover. Many people fall into the trap of believing private health insurance covers all ambulance travel, but in fact it will often only apply to an emergency ambulance—and that depends on how the state ambulance service categorises your medical condition. Cover also varies from state to state, including where the accident or emergency occurs as well as where you are insured.
• Consider your excess. If you’re looking to save money, there are options to pay a higher excess to reduce your premium. Just remember you’ll need to be prepared to pay the excess if you do go to hospital.
• The longer you wait, the more you’ll pay. In 1999 the government introduced Lifetime Health Cover, which is a two percent loading on private health insurance premiums for every year that a person over the age of 30 is without private hospital cover (up to a maximum of 70 percent). If you are a high income earner, you’ll also pay the Medicare Levy Surcharge for every day you don’t have private health insurance.

The hope, of course, is that people live a long and healthy life and won’t need the protection that private health insurance provides. But the reality is that almost everyone will benefit from health cover—be it sooner or later.

1. Australian Health Survey: Health Service Usage and Health Related Actions, Australian Bureau of Statistics, 2011-12

2. ibid

3. ibid

4. Long term funding of health and ageing: The rising pressures on commonwealth and state budgets, commissioned by the Business Council of Australia, prepared by Deloitte Access Economics, 2013

5. Towards Responsible Government, The Report of the National Commission of Audit Phase One, Commonwealth of Australia, February 2014

6. The Operations of Private Health Insurers, PHIAC Annual Report 2012-2013, Australian Government

7. Pausing indexation of some Medicare Benefits Schedule fees and the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds, Budget Paper No. 2: Budget Measures, Part 2: Expense Measures, Australian Government, 2014/2015

8. Australian share ownership study, Australian Stock Exchange, 2013