Thinking of ditching private health insurance in the pandemic? Here's how to calculate if it's worth it for you
Wednesday, Oct 21, 2020, 07:00 PM | Source: The Conversation
Almost all private health insurers increased their premiums in October, and have scheduled another price rise for April 2021. As many people struggle financially amid the pandemic, you may be wondering whether you should drop your private health insurance altogether.
Before you do, bear in mind some government policies affect the cost of your insurance, and sometimes dropping it may even cost you more.
Here’s the bottom line
For singles with an income above A$105,000, and for families with an income above $180,000, it’s worth buying private hospital cover even if you don’t think you’ll use it. I’ll explain why in a moment.
People with incomes below these levels need to compare value and costs. The decision varies a lot depending on your age.
Throughout this article, we’re talking about hospital cover, not “extras” like dental, optical or physio, which aren’t affected by these policies. You can buy extras cover separately without hospital cover. Extras cover is much cheaper than hospital cover, and an easier decision overall — you can readily compare how much you stand to gain from extras cover (based on how often you’re expecting to visit a physiotherapist, for instance) and then weigh that against how much it will cost you.
Here are the main things you should factor in when deciding on hospital cover.
There’s the Medicare levy, and then there’s the surcharge
Almost all Australians pay 2% of their taxable income as the Medicare levy. This money goes towards funding parts of the public health-care system. It pays for Australians to get free (or much cheaper) GP visits and care in public hospitals.
If you earn above a certain income and don’t have private hospital cover (extras cover does not apply), you have to pay an extra 1-1.5% of your taxable income, called the Medicare levy surcharge.
For example, if John Citizen has a total taxable income of $150,000, he must pay $2,250 in additional tax (the Medicare levy surcharge), on top of the $3,000 he already pays as the Medicare levy. If he buys an appropriate level of private hospital cover, he can waive this extra tax and just pay the $3,000.
Keep an eye on government rebates
Singles with an income below $140,000, and families with an income below $280,000, can get government rebates on their private health insurance — that is, a partial refund. The level of this rebate varies by income and age.
Discounts for the young
Since April 2019, people aged 18–29 have been able to get discounts of up to 10% of their private hospital premiums. The allowable discounts are 2% for people aged 29, 4% for 28, 6% for 27, 8% for 26, and 10% for 18-25. People will retain that discount until they turn 41, then the discount gradually decreases by 2% per year.
Factoring the above policies in, for singles with an income above $105,000 and families with an income above $180,000, it makes sense to buy private hospital insurance even if you won’t use it. That’s because you can find hospital cover cheaper than the Medicare levy surcharge.
For those with an income below these levels, you need to compare whether the value is more than the cost. Value consists of two components: protection from unexpected catastrophic risk, and your expected use of private hospital care.
First, value from risk protection is highly subjective, depending on your level of tolerance for potentially catastrophic uncertainties. Some people might naturally be more anxious about risks, but others less so. For example, people buy home and contents insurance to cover unexpected natural or accidental catastrophes, or burglary. But arguably, this component of value is small in the health insurance market because all Australians are insured by Medicare to cover their health needs in public hospitals, and are therefore protected from the financial risk of catastrophic health problems.
Second, there is value in buying private health insurance if you anticipate using private care, which can reduce your waiting time for certain elective surgeries, or give you a choice of doctors. This goes to the second part of value: expected use.
Take a look at the table below for the national averages for your age regarding your expected use of private hospital care. Basically, the older you are, the more you’re likely to use it, and the greater the expected benefit.
Here’s an example. If you are single, 24 years old, are comfortable taking risks, have an income below $90,000, and your expected use of private hospital care is in line with the national average, your value from buying private hospital insurance is about $550 a year. As per the above graph, for people 20-24 years old, $550 was the national average of benefits actually paid by private insurance companies between July 2019 and June 2020.
Meanwhile, your median premium cost is $1,457 after rebates and discounts, and you are exempt from the Medicare levy surcharge. So it may not be worth buying private hospital insurance in this set of circumstances.
When comparing value and costs, you are most likely better off buying private hospital insurance given the current government policies for the following scenarios:
family cover: family income above $180,000; family income below $180,000 if older than 44 or with special needs for private hospital care (such as childbirth in private hospitals).
single cover: income above $105,001; income below $90,000 and older than 54; income between $90,000 and $105,001 and older than 24.
And don’t forget
There are a few final things you should keep in mind. When you use your insurance for a stay in hospital, there will be out-of-pocket, or “gap”, costs. So you’ll still have to pay extra even with private hospital insurance.
Then there is the Lifetime Health Cover loading, which adds 2% to your insurance premiums for every year you are over 30 if you don’t have hospital cover by 1 July following your 31st birthday.
For example, if you wait until you’re 40 to buy private hospital insurance for the first time, you could pay an extra 20% on hospital premiums. The loading is removed once you’ve held appropriate private hospital cover for ten consecutive years.
More generous coverage requires higher premiums. What’s more, even for the same coverage, premiums may vary substantially across insurers. So, shop around and use free resources to compare health insurance policies.
Finally, it’s a good idea to re-evaluate your options every year or every other year as your situation or government policy changes.
Professor Yuting Zhang receives funding from Australian Research Council Future Fellowship and National Health and Medical Research Council's Medical Research Future Fund.