Private Health Cover vs Medicare Levy Surcharge:

Will private health cover really save you money? — Higher income earners are encouraged to purchase private health cover to avoid paying the Medicare Levy Surcharge. But is this actually the right thing to do?

There is a lot of debate in the media about the pros and cons of private health insurance. People are asking, “Should I get private health cover?”

Opinions about private health cover are changing. Saving on taxes is part of the decision.

According to Australian consumer watchdog, Choice, cheaper private health policies that only meet the minimum for you to be exempt from paying the Medicare Levy Surcharge in your taxes are nicknamed “Junk” because those cheap plans cover so few treatments – leaving you out of pocket for basic health services.

With “junk” health cover plans, you avoid extra tax and surcharges, but it gives you very minimal coverage for treatments or accidents.

Responding to growing consumer debate, the Australian Competition and Consumer Commission (ACCC) has called for standardisation of policies across providers.

At the other end of the spectrum, some experts suggest a better solution to the complex overlap of Medicare and private health cover would be the option to opt out of Medicare all together.

Tom Godfrey, from Choice, pointed out cumulative price increases of 52% since 2010, reducing the accessibility and appeal of private plans.

Complicated policies, hidden or unknown out of pocket fees and complicated jargon makes it almost impossible for consumers to be sure what their health plans actually cover. When it comes to the crunch, some policy holders find it’s easier and cheaper to use the public system rather than use the health insurance benefits they are paying for.

Unfortunately, private health cover policies remain a labyrinth of confusion that won’t improve in the near future.

Why is Etax writing about health cover?

There are many arguments for and against private health cover. But the one thing most people can agree on is, paying for private hospital cover will save most Australians some tax money.

That’s because the Australian Government designed a system that uses tax to ‘encourage’ everyone to get private cover, even though we have a national healthcare system – Medicare. If you don’t have private cover, then as your income grows over time, the amount you pay to the Government in extra taxes increases so fast that getting private cover can become cheaper than paying that tax surcharge.

But choosing the right plan at the right cost is not simple. A cheap plan or an expensive one? Hospital or extras, or both? Which insurers are better? What will actually be covered?

Private health cover is something many Etax clients ask about, so let’s look at this more closely and find some good resources for making decisions about private cover.

Let’s start with the basics, plus a few common questions:

What is private health cover?

It is an insurance policy you pay for monthly or yearly, and it p-ays for part of your medical expenses when you need treatments or hospitalisation.

There are two types of private health cover:

Hospital – to help when you need to go to hospital. This covers you for doctors, treatments, overnights rooms and theatre costs.
General (usually known as extras) – to help with ancillary treatments such as optical and dental care plus some alternative or allied health services like physio and massage.

Private health policies are often sold with a mix of hospital and extras cover.

According to Private Health Care Australia, 52% of Australians have private health cover.

Why do we have private health cover when we can use Medicare?

Private health cover eases the burden on our underfunded public health system. Private health cover is perceived to provide policyholders with extra benefits like,

the ability to choose the hospital and the date of medical treatments and operations,
better quality of care with private room options,
access to special services like private rooms or nicer maternity wards,
shorter wait times,
cover for dental and optical expenses,
a sense of security, should the worst happen,
a good way to pay less tax. (see below)

Does private cover work?

Yes. For many Australians, private health cover makes good sense. A good quality policy looks after your family and provides the security that your family will be looked after, quickly, when needed.

However, a growing reality is that many policyholders, especially those on lower or medium incomes, are becoming disillusioned and are dropping out of private cover.

Why are some people quitting their private health cover?

In six months leading up to November last year, half a million Australians downgraded or canceled their private health policies.

According to a Galaxy poll, another half a million threatened to do the same in the lead up to the annual price increase this April.

News coverage suggests the key reasons for this exodus away from private health is due to:

The cost. Annual fee increases, far above CPI, move the better quality private health polices beyond the reach of many Australians.
With many policies, you still pay out of pocket for part of the medical services you need; this “dollar gap” is the difference between the amount charged by a medical specialist or hospital and the lower amount paid by the policy. With expensive plans this gap can be smaller (or in some cases, top plans leave no gap) but with common, cheaper plans the gap looks more like a chasm, leaving some lower-income patients with unexpected bills.
Confusing policies that are difficult to understand and even harder to compare mean people sometimes don’t get the cover they expected, but don’t realise until it’s too late.

What’s the alternative to private health cover?

Medicare, our public system, looks after all Australians and Australian residents.

Pros

Quality of care in our public hospitals usually rivals that of private hospitals.
Public hospitals often have a broader spectrum of equipment and specialists in each location, which means that patients can undergo multiple tests, scans and procedures in one place.
Many procedures and operations require no out of pocket expenses from the patient.

Cons

Waiting times can be long. This can be real issue for people waiting for operations such a knee or hip operations where quality of life is severely diminished.
You have no choice when it comes to when or where your treatment, consultations or operations are. If you are unable to make a date sent to you, you may drop to the bottom of the list again.
Under-funding is evident where some waiting rooms are slow, understaffed, overcrowded. This can commonly result is a 2-4 hour wait.
Medicare does not cover general care, such as dental treatment or optometry.

Medicare is funded by government revenue and via the compulsory Medicare Levy that most Australians pay to the ATO in their taxes. The Medicare Levy currently takes 2% of our annual income.

Higher income earners are ‘encouraged’ to take out private hospital cover in order to ease the burden on the public system, and if they don’t, the levy can cost them a LOT of money.

Medicare Levy Surcharge: This is how private health cover can create tax savings

People earning $90,000 or more ($180,000 or above for families) are also required to pay an additional 1-1.5% of their annual income to the government. This is called the Medicare Levy Surcharge.

Medicare Levy Surcharge rates (sourced from the ATO)

Medicare Levy Surcharge rates for 2016
* The family income threshold increases by $1,500 for each Medicare levy surcharge dependent child after the first child.

Example: How John’s private health cover saves him money at tax time

John is 29, lives in Queensland and earns $110,000 a year. John’s income puts him over the $90,000 threshold so, without private hospital cover, he’ll pay 1.25% of his taxable income to the Medicare Levy Surcharge (MLS). This equals $1,375 a year.

Instead John chose a typical QLD private hospital cover plan costing $1,250 for young singles like him. John is also eligible for the Australian Government Private Health Insurance Rebate (8.93% of his hospital cover). Because John has private hospital cover, he does not have to pay the Medicare Levy Surcharge.

Without hospital cover, John will pay the Medicare Levy Surcharge at $1375 per year
With basic hospital cover, John pays $1,138 after the Private Health Rebate
With hospital cover, John’s annual tax saving is about $237

(NOTE: Only private hospital cover creates an exemption from the Medicare Levy Surcharge. Extras does not affect your tax situation, so that cost is all paid by you. The average cost for hospital plus extras cover in QLD $1,831. See below for average costs across Australia.)

Lifetime Health Cover is a financial loading payable on top of your policy if you fail to take out (or keep) Private Hospital cover before your 31^st birthday. This amounts to 2% of the policy cost PER year for EVERY year you are over 30, up to a maximum of 70%.

60-79 year olds their Private Health cover the most, followed closely by 20-30 year old females to claim maternity care. — Who uses private health cover the most? Retirement-age Australians, followed closely by 20-30 year old females who want better maternity care and fewer maternity expenses.

One big question for Australians:

If private health cover won’t take care of my common medical needs, is it better than paying into a public medical system that does?”

Our conclusion

You simply need to do the sums (or ask a tax agent for help), think about what you can afford, think about how much you value the benefits of private health over public, and make a decision that fits you best.

If you make a good income, can afford a high-level private plan with minimal gap costs and value good benefits, services and a sense of security then maybe a comprehensive private plan makes sense for you. But as a higher income earner, you probably won’t see a tax advantage (and Federal Government rumours suggest that private health tax advantages might disappear completely for higher income earners).

If you make a lower or average income and, when you do the sums, a private hospital plan means a bigger tax refund for you, and if your private cover won’t change your own decisions and spending to leave you out of pocket, then “yes” to private cover might be a “no-brainer”.

On the other hand, if you buy basic private hospital cover just to avoid paying a bit of tax, but end up using lots of expensive health services and pay an out-of-pocket gap each time, that might put you behind financially.

This does not mean that you should ignore private health cover. It simply means that IF you choose the private health cover option, it makes far sense to purchase a policy that actually looks after you when you need it.

Your decision about private health is complicated. You need to decide how important each of these things are to you personally: The financial costs, the possible tax gain, access to private facilities and services, access to better services if you need maternity or other special services, more worry-free care in emergencies (if you have a good plan), and how much you value (and will actually use) extras if you decide to pay for that…

…that’s a lot for each person to consider.

Try some of the links from Choice and the Guardian down below – they have useful interactive tools that help you decide whether private health makes sense for you.

When choosing your private health cover option, we suggest it’s good to take your time. Concentrate on getting yourself and your family an affordable policy that provides everything that you need (and not including items you don’t need, eg. retirees don’t need maternity services).

Read (lots) so you really understand what you need.
Talk to friends, family and work colleagues.
Ask health professionals for advice, where possible.
Ask private health cover providers plenty of questions and never worry about asking too many. Tell them what you need and also what you don’t want to pay for.
Use a checklist to make sure you don’t miss anything out when making your decision.