Australia has an excellent, universal public health system which everyone has access to regardless of insurance or income. For common health needs, there are no significant, unavoidable costs that are charged by the public health system but can be covered by private hospital insurance instead There are also few circumstances in which shorter waiting lists, choosing your own doctor, and having the option of using private hospitals are worthwhile for those in good health. So, for people who are healthier than average (e.g. most young people), it typically makes financial sense not to pay for private hospital insurance.
Unfortunately, instead of using a fairer and more efficient tax system to properly fund effective public health services for everyone, Australian governments have chosen to use an inefficient tax system to subsidise an ineffective private health industry.
Consequently, a large proportion of working age Australians only maintain private hospital insurance because the Australian tax system penalises anyone earning over $90,000 a year with extra tax (via the Medicare Levy Surcharge) if they don't have private hospital insurance. This extra tax is designed to cost at least as much, if not more, than the cost of basic private hospital insurance. Even those earning under $90,000 a year are persuaded that the Lifetime Health Cover loading, a penalty that kicks in after you turn 30, is a good reason to pay for private hospital cover.
In this post, I explain in what circumstances it makes sense to eliminate paying for private hospital insurance and how much money you will save in the long run. I also discuss why it is generally worthwhile finding value-for-money private extras insurance (dental, optical, etc).
Gain: ~$600 to $900/yr by not having private hospital insurance or ~$300/yr by getting the cheapest private hospital cover to avoid the MLS.
My Situation: As I earn under $90,000 a year, I don't waste money on private hospital insurance and do not pay the Medicare Levy Surcharge (MLS). If I did earn over $90,000/yr I would use Privatehealth.gov.au to find the cheapest private hospital cover that simply avoids the MLS (As of Oct 2016 that was HIF GoldVital costing $562/yr). If I earned over $90,000/yr and wanted an inexpensive private hospital cover that I also may need to use, I'd review useful coverage of the cheaper policies and end up with Frank Basic Hospital (or similar) costing around $736/yr.
I do pay for Extras insurance as the cheapest, value-for-money policies offer 1-2 free dental checkup and cleans per year plus no-gap on some dental services and around $200/yr of optical benefits. I pay $184.60/yr for HCF - Bronze Plus Extras. (See: Start using the best value-for-money Extras health insurance for dental and optical)
1. If you're healthy and don't have any need of services that are more quickly or effectively provided with private hospital insurance, then whether to pay for hospital insurance is primarily a simple decision about whether the extra tax penalty applies. Value-for-money extras (dental, optical, etc) insurance is usually worthwhile
I'm very healthy and have no need of private hospital cover. From 2010 to March 2016 I've had private health insurance and never used the private hospital cover. I did use a public hospital once, when I broke my leg, and the access and treatment was excellent and virtually free.
I only obtained private health insurance because I earned over $90,000 a year and got tired of voluntarily paying the Medicare Levy Surcharge (MLS) instead - an increasing tax penalty starting from $900 that rapidly escalates in proportion to your annual taxable income. E.g. For an annual taxable income of $140,001 the Medicare Levy Surcharge = $2,100.
An additional factor to consider is that these private health insurance premiums have Australian Governent Rebates based on your annual taxable income (applying to hospital cover only not Extras). In the most relevant category of workers aged under 65 the rebate drops from 27.82% at under $90,000 to 0% at $140,001:
The cheapest private health insurance cover that avoids the MLS is typically known as "Basic/Budget/Starter Hospital" or "Accident Cover" with a $500 excess (per hospital visit or capped per annum). Below are the 2015 monthly premiums for the cheapest hospital policies from Australia's insurers. HIF's GoldVital is the absolute cheapest at $67.65/mnth or $811.80/yr (before rebates/discounts).
These amounts are before the government rebate (27.82% for those under 65 earning less than $90,000) and any additional discounts for direct debit or paying annually. The HIF GoldVital hospital cover with the Base Tier discount of 27.82% and 4% discount for paying annually comes to only $562.50/yr which is significantly less than the $900+ extra tax payable due to the Medicare Levy Surcharge.
Note that you need to use the government site Privatehealth.gov.au to find the cheapest private hospital cover as it is the only one that compares all providers and has up-to-date details.
All for-profit providers such as iSelect, Compare the Market, Choosi, Choosewell and Members Own only compare a fraction of providers and policies (some compare less than 10%). They also obtain 27-35% of the first year's premium.
See: > Bupa slams comparator websites for diverting funds from healthcare and demands transparency
If you're getting Basic Hospital cover anyway and will be using dental, optical and other common health services, it's often most cost effective to add "Extras" (aka "General Treatment") cover and pay for a combined policy. The cheapest combined Basic Hospital + Basic Extras 2015 monthly premiums from Australia's major insurers on http://www.privatehealth.gov.au are listed below.
However, the "Combined" search option on http://www.privatehealth.gov.au misses some insurers like HIF. The cheapest combined policy is actually HIF's GoldVital Hospital + Vital Options which can be had for $755/yr. However, the Vital Options policy covers little and the next level up - Saver Options - is the best value extras cover. This can be had for $783.30.
For an extra $220.80/yr most people would be able to get much more value (~$300 - $500) from the dental, optical and other services covered, including 80-100% back on preventative dental checkups and cleans.
Summary:
From the above figures, the basic maths should be clear:
- If you're earning over $90.000 a year in annual taxable income the MLS extra tax will be at least $900 and increase quickly (e.g. to $2,100 for a $140,000/yr income) and you can get Basic Hospital cover for less than $600 and save at least $300. (At a $140,000/yr income you'd save $1,500).
- The debateable case is only for those earning less than $90,000 in annual taxable income and not liable for a minimum of $900 extra tax. Is private hospital insurance worthwhile if you're in good health and especially if young and not likely to have much to gain from private hospital services? And is private extras insurance worthwhile taking out even though there is no tax penalty if you don't?
2. If earning less than $90,000 in annual taxable income and in good health, is private hospital insurance worthwhile? And what about extras insurance?
Since Oct 2015 I have quit work and my taxable income in future years will typically be less than $50,000 a year. As of April 2016, I have decided not to continue paying for private hospital insurance. I have decided to continue with private extras insurance (dental, optical, etc). The main financial implications are:
- I'll save from $600 to $900 a year in private hospital insurance premiums for Basic Hospital (depending on how much of the rebate I'd qualify for each year). Note premiums increase around 5% a year.
- I won't have to pay the Medicare Levy Surcharge ($900+).
- Without Extras insurance I'd have to start paying by myself at least $150/year for dental services (and much more for dental repair) and $150/year for contact lenses. And, if desired, also $44/yr for Ambulance Victoria membership. Given decent Extras insurance can be had for as little as $180/yr with HCF - Bronze Plus Extras, it's a no brainer to have Extras insurance.
So let's do the maths on the long run savings assuming an average annual premium of $700 for Basic Hospital. I'll save around $700 a year, and even more if premiums continue to rise at 5%/yr and if the rebate gets scaled back.
$700 saved per year at an interest rate of 5% and compounded over 20 years = $23,146.
I consider this a significant saving and private hospital cover to be entirely unnecessary for me for a very long time, if ever.
3. Won't private hospital insurance ultimately be necessary and then won't you need to pay 70% extra due to the Lifetime Healthcover Loading?
The Australian government has another penalty called the Lifetime Health Cover (LHC) Loading. Once past the age of 31, for every year you don't have private health insurance you will pay an extra 2% on your premiums.
My LHC loading is 6% currently. After 20 years of not paying for private hospital cover it will be 46%.
This is worth considering if you think that at some stage you will need to take out private health cover and maintain it till you die, but I don't think I will. I have significant savings and can easily self-insure and pay any private fees in full myself but only if I ever need the services.
The reality is that Basic Hospital cover is already expensive enough and covers virtually no hospital service I would ever benefit from obtaining through the private system rather than public.
You can obviously increase your cover to many more types of services (e.g. possibly elective surgeries that have long waiting lists in the public system) but the premiums become ridiculously expensive. Hence, it makes no sense to do so for many years in advance. And if you can build up significant savings to self-insure, it makes no sense to pay expensive insurance premiums ever.
4. What is the most value-for-money Basic Hospital policy available as opposed to the absolute cheapest avoiding the Medicare Levy Surcharge?
The consumer advocacy organisation Choice recently raised concerns about "junk insurance" hospital cover:
Junk policies only cover about one percent of treatments in hospital, or will only cover you for an accident. They usually don't cover treatments for the most common serious diseases, like cancer, stroke or heart disease and won't give you access to private psychiatric facilities in case of a mental illness.
"If you require reconstructive surgery after breast cancer, private hospital rehab after stroke, or heart surgery, these policies are useless," says CHOICE head of media Tom Godfrey. "It's ludicrous that consumers pay thousands to insurers for these poor-value policies to avoid government surcharges but have to turn to the public system when they get sick as their insurance is effectively useless."Choice's examples of hospital policies that are exempt from the Medicare Levy Surcharge but that supposedly provide very little cover included:
Don't waste your money on junk health insurance
- Australian Unity Basic Hospital
- Defence Health Essentials Hospital
- HIF Gold Vital
- Medibank Young Hospital
- NIB Basic Hospital
- HCF Accident Hospital Only Cover
- Medibank Accident Cover
However, if you are young and healthy and purely interested in avoiding the Medicare Levy Surcharge and prepared to rely on the public health system (including possible waiting lists or being operated on by less experienced surgeons), then this is actually just a list of some of the cheapest MLS-exempt policies.
Indeed, Choice itself has advice on finding hospital cover purely to avoid the MLS: Cheapest hospital health insurance. Though, as it didn't call out HIF Gold Vital as the cheapest then its list is outdated.
I agree that value-for-money should be a consideration if the difference in cost is not considerable compared to the difference in useful coverage. Often you may be able to go one level up to useful coverage without paying a lot more. But, in my view, HIF Gold Vital is value-for-money (for its cost its coverage is great) while Medibank Accident Cover is definitely not.
In fact, the Accident-only and Public Hospital-only coverage is always very poor value-for-money, especially given that Basic Hospital policies (like HIF Gold Vital) provide much better coverage at a much lower cost.
Overall, the standout value-for-money hospital cover appears to be Frank Basic Hospital. You can use the compare feature to check some of the main coverage elements. Below I selected some of the most expensive policies to compare against and clearly cost is not a great indicator of value-for-money when it comes to private hospital cover.
5. Suspend your health insurance when overseas for more than 30 days. Take advantage of the 3 years of legitimate "Days of Absence" to reduce Lifetime Health Cover Loading
You can apply to suspend your membership if you’re travelling overseas, receiving a Newstart Allowance or Sickness Allowance from Centrelink, or for a justified reason approved by your fund.
If you won't be using your cover temporarily - most commonly an overseas trip of over 30 days - then suspending your health cover will save the full amount of your private health insurance costs for this period.
Also, understand the rules for minimising Lifetime Health Cover Loading after you turn 30. Instead of paying the maximum loading you can potentially use some of the 3 years of "Days of Absence" to reduce the loading period. You would need to advise your health fund of this desired usage as otherwise they will not tap into your 3 years "Days of Absence" buffer and will apply the maximum LHC loading.
You can go without any Hospital Cover health insurance for periods adding up to 1,094 Days of Absence in total (i.e. 3 years less one day). This is useful for small gaps when you are not covered by any private health insurance, such as when you switch from one fund to another. Once you have used up your total Days of Absence allowed (1,094 days), you will pay LHC loading of 2% on top of any previous loading you were already paying. The amount of LHC loading you pay will increase by 2% for every year you spend without cover after the 1,094 Days of Absence are used up.
Canstar - Can I Suspend My Health Insurance Policy?
Further Info:
thesmartmoney.com.au
> Should I cancel my health insurance?
The Guardian
> Private health cover: governments only care about rising costs when they're paying, not you
ABC
Consumer Guides - Private Health Insurance
Choice
> Insurance - Health
Canstar
> Health Insurance
Fairfax
> How to beat health insurance price hikes
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