Dissatisfaction with Australia’s maze-like private health insurance system hit a peak last year, when record numbers of people complained to the Private Health Insurance Ombudsman about their cover.
The Ombudsman – whose job it is to mediate between disgruntled customers and insurance companies – recorded 5750 complaints in 2016-17. That was a 30 per cent increase on the previous year.
It follows news that health insurance premiums will be rising on average by 3.95 per cent in April, or around twice as much as wages and inflation – news that will have fired up many Aussie consumers sick of forking out hundreds of dollars a month on cover they may seldom or never use.
So why are so many of us – 50 per cent according to recent figures – buying expensive health insurance when we’re all covered by Medicare?
There are a range of reasons why people splash out on private health insurance: avoiding the Medicare levy surcharge; avoiding lifetime penalty loading; avoiding waiting times for procedures; and being able to choose your doctor and hospital.
So let’s deal with each of those in turn.
Are there tax advantages for private health insurance?
In a nutshell, if you’re single and earn less than $90,000 a year, or are part of a couple that earns less than $180,000 a year, there is no tax advantage to getting private health insurance.
First of all, let’s be clear: the Medicare levy and the Medicare levy surcharge are two different things.
The Medicare levy is a 2 per cent tax on income over a certain threshold.
Most working people pay the Medicare levy (as long they earn more than $27,069, or more than $45,676 for a family). Buying private health insurance does not make any difference to this.
But buying private health insurance does stop you paying the Medicare levy surcharge (or MLS) under certain circumstances.
The MLS is an extra tax on top of the Medicare levy. If you’re single and earn more than $90,000 a year, you pay an extra 1 per cent tax (but only on the money you earn over $90,000).
This goes up to 1.25 per cent after $105,000, and 1.5 per cent after $140,000.
For couples, the thresholds are $180,000 (1 per cent), $210,000 (1.25 per cent) and $280,000 (1.5 per cent).
So the more you earn, the more likely you are to be better off getting private health insurance.
The Lifetime Health Cover penalty (or ‘Why you should stay 30 forever’)
The Lifetime Health Cover penalty was introduced by John Howard’s government in 2000, and it does something rather strange.
For every year from the age of 31 that you don’t get private health insurance, the government forces private insurance companies to add an extra 2 per cent on top of the premium.
Here’s an example.
Donald and Vladimir are both 30. Donald decides to buy a health insurance policy for $60 a month. Vladimir decides to rely exclusively on Medicare.
Both continue like this for 20 years. But on his 50th birthday, Vladimir, surprised by a whiff of mortality, decides he’d like to get some private cover. So he asks Donald what insurer he’s with, and Donald tells him.
Thanks to premium increases, Donald is now paying $100 a month for basic hospital cover. Vladimir opts for exactly the same policy. But because he has waited 20 years from the age of 31, he must now pay an extra 40 per cent.
In other words, for exactly the same cover, Donald is paying $100 a month and Vladimir is paying $140. That’s an extra $480 a year.
Of course, if you never get health insurance, none of this matters.
Shorter waiting times, more choice
Quality of care?
So far we’ve only looked at the government-imposed penalties. But is there a strong argument for private health cover based on the quality of care?
This is a trickier one to answer as every individual policy offers different levels of care, and every person has different needs.
Private policies generally allow customers to pick their own doctor and hospital – something that Medicare does not allow.
This may be particularly attractive for people with longer-term illnesses, or pregnant women.
Private hospitals, while not necessarily better than public ones from a medical perspective, are often perceived as more pleasant environments.
Research by academics Karen Willis and Sophie Lewis revealed patients found public hospitals more stressful, while private hospitals were calm places with nice rooms.
Waiting times are also a factor. While it is difficult to get accurate figures since waiting times are not published for the private sector, most experts agree that waiting times are much longer in the public sector.
And then there’s ambulance fees, which could cost more than $5000 if you don’t have cover. According to insurer NIB, the average ambulance fee is just over $800.