Private Health insurance Australia: What, When & How.

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Are you considering purchasing health insurance?  Confused and don’t know where to start? 

First consider whether you will really benefit from a policy. I have quoted statistics from the March 2020 APRA private health report

Those paying for private healthcare are takin strain off the public system.  Most of us would prefer insurance premiums provided value for money as well.

Private health insurance is encouraged by the government.  The public are motivated to pay for a policy to avoid Medicare Levy surcharge and Lifetime Health cover.  Their strategy seems to be working – 43.8% of Australians have private health insurance in 2020.

Insurance companies exist, like all businesses, to make a profit. 

 

Private Health Insurance is Expensive.

An average person pays more premiums than benefits received.  Premiums range from ~$1200 to $12000 per year! 

After paying premiums, extra costs are charged for treatment in the private system. 

There is usually an excess to pay (commonly $500 per admission).  “Gap” charges are the difference between benefit paid for a service and fee charged.  Unfortunately, insurance companies will often not cover the gap.  

The average out of pocket expense for all private hospital episodes in the first quarter or 2020 was $324.04.  

Types of Private Health Insurance Australia: Hospital and Extras

You can choose hospital cover, extras, both or neither. 

Hospital cover, as the name suggests, covers admission to a private hospital. 

Extras cover pays most generously for dental check-ups and treatment.  It also pays benefits for glasses or contacts, physiotherapy, remedial massage and more.

Surprisingly, there is no benefit to getting hospital and extras cover together.  So research the policies you need separately.  This will allow you to optimize benefits to suit your family and price paid.

Medicare Levy Surcharge (MLS)

The MLS starts at 1% of income of $90,000 or more, unless you have hospital cover.  Extras cover is irrelevant here. 

On a gross salary of $90,000, $900 MLS tax is incurred.  Although you will avoid paying MLS with hospital cover, the premium is likely to be cost even more.  The benefits paid for this level of premium are often small, with lots of out of pocket costs.  It is not worth getting hospital cover at this income unless you value the insurance itself.

MLS increases to 1.25% when your income reaches $105,000, costing $1312 if you don’t have hospital cover.  You should be able to pay similar or less for a hospital cover policy.   You may as well get a policy at this stage.

MLS Increases to 1.5% once your income reaches $140,000, minimum MLS payable $2100.  From here, private hospital cover is worthwhile purely for tax savings alone.  Other ways to save on tax discussed here.

how to pay less tax

Lifetime Health Cover (LHC)

Health insurance companies love to advertise the LHC. 

They give the impression that premiums will increase exponentially if a policy is not started before your 31st birthday. 

But as this article illustrates so well, the LHC only increases 2% per year from 31 years of age.

If you earn less than $90,000, you will save money in premiums by delaying health cover until you want or need it.

The LHC continues to increase until age 65, when a 70% premium will apply!  LHC loading continues to apply for ten long years before you are forgiven and premiums reduce.  But that is still cheaper than paying for decades of cover you don’t want!

A break in cover of 1094 days is allowed over a lifetime before the LHC is reapplied.   If you take 1 day longer (3 years) the LHC will be reapplied for ten years. When you take a break from private health insurance after the age of 31, set reminders!   

If you move overseas for more than 12 months and cancel your insurance, this is excluded from the 1094 day limit.  You must reinstate a policy on return to avoid LHC though.

You may even be able to suspend your health insurance for an extended holiday.  This also is excluded from the 1094 day limit.  The MLS will then apply for the time you were without insurance.

Insurance companies may let you suspend cover for COVID related financial stress. 

Exemptions from the LHC

You are considered to have had private health insurance before age 31 if you:

  • Are a new migrant to Australia
  • Were in the defense force
  • Have a gold card awarded after 1999 (considered equivalent to private health insurance)
  • Were overseas when you turned 31
  • Are a non-resident (Not eligible for green or blue medicare card)
  • Have had health services provided by the Australian Antarctic division

In these situations, you have 1094 days after turning 31 to secure a policy before  LHC applies.    See Private Health cover website for more details on LHC.

Private Health Insurance Australia: Hospital Cover

Why You May Not Want Hospital Cover

Treatment provided in public hospitals is of high quality, with rigorous processes to continuously improve patient care.

If you are involved in a serious accident, or are severely unwell, you will usually be treated in a public hospital. 

Public hospitals are generally better equipped to deal with severe illness or injury. 

On the other hand, private hospitals are well suited to non-urgent surgery and medical management.

Private hospitals are usually staffed by independent contractors.  When the orthopaedic surgeon goes on holiday in a smaller private hospital, no-one gets admitted privately with a broken hip. 

Over popular holiday periods, this can mean minimal services available in a private hospital, particularly in regional towns.

People aged 60-84 years of age claim the most benefits from hospital cover.  Premiums don’t increase with age (excluding LHC).  So younger premium payers subsidize the healthcare of older members.

Why You May Want Hospital Cover

Public hospitals do tend to be noisy.  There is almost bed pressure and elective surgery cancellations due to emergencies. 

In a public hospital, you are treated in order of urgency, which can mean longer waits if you are not severely unwell. 

Waiting times for planned non-urgent surgery such as joint replacement can be long and painful. 

Public hospitals are busy, often chaotic and can be inefficient.

In private hospitals, there are usually less severely unwell patients, and more predictability. 

Private hospitals tend to be nicer, calmer and quieter environments to be in, feeling more like a cross between a hospital and an odd hotel!

Being cared for in a private hospital can also be a more personal experience.  You will see the same doctor each time more often. Also, you can request a particular specialist (though they are under no obligation to accept you as a patient).

It could be cost effective to invest premiums instead and pay out of pocket for treatments. 

Unfortunately, private hospitals usually won’t accept patients without insurance, due to the risk of costs spiraling if treatment does not go according to plan. 

Private Health Insurance Australia: Extras Cover

“Extras” insurance is separate.  This type of cover pays for dental, orthodontic, physiotherapy, massage, opticians, gym membership and weight loss programs.  Benefits rarely cover the entire cost of treatment.  The average benefit paid per person in the first quarter of 2020 was $434.  The average out of pocket cost was $50.46. 

Whereas older Australians benefit most from hospital cover, extras benefits are more evenly spread among age groups.  Most benefits are paid for dental treatment.

There are hundreds of policies available.  They all have benefits and limits on what you can claim annually. 

Most people pay more in premiums than they receive in benefits. Large families with several children requiring regular dental check-ups and orthodontics are likely to benefit most.   

 

Cost/Benefit Analysis

My eldest child will likely need orthodontic treatment in the next few years, which was the precipitant for a lot of research this week. 

The waiting period for dental check ups is often 2 months, for orthodontics usually a year.  Premiums would be paid for a year before being eligible for orthodontic benefits. 

I assessed the expected benefits vs premium paid for my family.  Calculations were based on my expectations of routine dental check-ups every 6 months, and my eldest to start orthodontic treatment within 2 years. 

I found one policy that I’d expect to claim more in benefits than premium paid over two years. 

Most of the policies I looked at limited claims for orthodontist treatment to ~$1000 per year.  Several of the policies included the orthodontic treatment within the dental claim limit.  Thousands of dollars out of pocket costs should be expected for orthodontic work, despite extras insurance. 

The benefit vs premium outcome depends on number of children, frequency of dentist visits, need for significant dental work or orthodontics.  In major cities, you may be able to access a fund’s preferred providers – resulting in more generous benefits.  

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Private Health Insurance Australia: How to Choose a Policy

With hundreds, if not thousands of policies available, assessing and choosing a policy can be overwhelming. 

I found Compare the Market to be the easiest comparison website.  There are several comparison websites but I found this one laid out the benefits you can claim in a comparable way. 

Decide which benefits you need.  Don’t be fooled into thinking you will get free massages with your policy.  Almost everything has out of pocket costs.  Only consider the services you would use without insurance.  Any extra benefits claimed can be a bonus if they occur.

Compare the different policies with expected benefits for your own family and premiums over 2 years.  You will then be able to quickly find any short-listed policies expected to pay more in benefits than premium paid.   

Over 2 years

Dental check ups

Dental clean

Braces

Total benefit

Premium Paid

Benefits payable with policy 1

6 monthly for 2 years

6 monthly for 2 years

Kid 1 x 1 orthodontic limit

Total benefits expected over 2 years

Premium payable over 2 years

Benefits payable with policy 2

     

Summary

Health insurance is not for everyone.  It is expensive and difficult to get value for money.  Higher income earners will need hospital cover to save money on tax.  Private hospital cover can also let you skip the public queue for non-urgent but quality of life destroying conditions.  You are more likely to benefit from hospital cover after age 60.

Extras cover maybe be worthwhile for families visiting dentists regularly or requiring orthodontic treatment.  Benefits payable, limits and small print need to be examined in detail to ensure it the policy is worthwhile.  If you decide to go without private health insurance have a policy consider investing the premium money instead.

private health insurance australia

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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