Diagnosing the Digits - is private health insurance what the doctor ordered?

Emergency Room 2017-08-25

There are few areas of tax law muddier and messier than the combination of private health insurance, the Medicare Levy Surcharge, and Lifetime Health Cover Loading.

The biggest problem is that almost every source that seeks to 'inform' you about them has a vested interest in guiding you directly into health insurance - the insurers want your premiums, and the government wants to steer you away from Medicare - particularly when it comes to hospitals.

The advertising seems almost to incite 'fear-mongering' - you wouldn't be alone if you almost got the feeling that if you didn't have private health insurance after the age of 31, the insurers would take all your money for premiums, while the government took all your money for taxes, and you would magically get sick very suddenly (just like computers seem to fail the day after the warranty expires).

But is it healthy to not have private health insurance? I'm going to diagnose the numbers for you so you can make an informed decision based on your own preferences around medical treatments and expenses.

What is Private Health Insurance?

Private Health Insurance is where you pay a premium to a private insurer (eg Bupa, AHM, Medibank etc) and in return they cover some or all of your medical expenses. Depending on the type and level of cover you get, you may be covered for:

- Hospital visits (accidents and general illness)
- Extras cover (physio, dental, optical, chiro etc)
- Both hospital and extras cover

It's important to note that for tax purposes, the only private health insurance that matters is hospital cover. You may choose to get extras cover for your own benefit, however extras only cover will not be enough to avoid the Medicare Levy Surcharge (MLS) or Lifetime Health Cover Loading (LHC).

What are the benefits of Private Health Insurance?

I'm going to mostly talk about tax things in this article, so consider this the section where we actually talk about what private health insurance can do for you.

The benefits listed below are basically 'what you get for your money'. If you're in a situation where the private health insurance will cost more than the potential taxes, you may still weigh up how much you like the safety of having your costs covered and decide you want the health insurance anyway.

Similarly, even if you do end up paying the Medicare Levy Surcharge, you may decide that you'd rather pay that than pay more for cover that you don't foresee yourself using or getting value for.

It's essential that you look at your own personal circumstances and make the best decision for you (and your family) medically and financially. The advice in this article is general and your own personal circumstances should be taken into consideration when making a decision.

Hospital Cover

Hospital cover generally covers your costs in a private hospital, less an 'excess' payable only once per year (usually $500 or less). This means if you're hospitalised more than once in the year, you only have to pay the $500 once.

The ATO requires that your cover have a maximum excess of $500 for singles or $1,000 for couples/families to be acceptable.

Generally private hospital cover allows you to skip long public waiting lists, or choose your preferred surgeon for many surgeries. It may also allow you to have a private room where available, and some policies also cover elective surgery (not just emergency/medically necessary surgery).

Private hospital cover generally does not cover out-patient emergency visits - for example if you go to the emergency room of a private hospital but are not admitted, you will be liable to pay the fee for that ER.

Low end hospital cover usually only covers the bare minimum - it will usually give you choice of doctor/surgeon/hospital, but may only cover a shared room. It may also only cover up to a certain value - most hospitals and doctors are 'no gap' these days, but there's no guarantee that there won't be gap fees for items that aren't covered by the insurance.

Low end hospital cover may also only cover accidents/illness - many of them exclude things like joint reconstructions or sports injuries, and some exclude pregnancy services at the low end.

It's important to always read the fine print when you're looking at hospital cover - some only cover their partner/preferred hospitals or surgeons, while others have limits or exclusions on many things.

Generally there is a waiting period of 2 months before you can claim on anything except emergency accident treatment.

Extras Cover

Remember - extras cover is completely irrelevant from a tax perspective. If you choose to get extras cover, it needs to be beneficial to you.

Extras cover covers many general medical expenses outside of hospitals. The most common of these are:

- Physio
- Dental (including major dental and orthodontia)
- Optical (glasses and contact lenses)
- Chiro
- And seriously heaps of others, the list is PAGES long for each policy

Extras are usually structured one of two ways - either with each section having a 'sub-limit' and each treatment having a limit within that (eg you can claim up to $300/year on physio at $35/visit, and $500 of dental with claims based on different types of dental work), or with the policy as a whole having an overarching limit which you can apply however you see fit (eg your total policy limit is $800, but you can use all $800 on physio at $35/visit, or all $800 on dental).

There are many different waiting periods on extras - usually starting from 2 months for basic physio etc, and going up as high as 2 years for things like major dental and orthodontics.

How much does basic Private Health Insurance cost?

From this point forward, we're only going to talk about the cost of hospital cover compared to the cost of the various taxes that may apply to you - as I mentioned above, extras are your own business.

Private health insurance premiums receive a rebate from the government - the current rebate is just over 25% for people under 65. Most insurers build this rebate into their pricing and I will do the same below (to reflect your out of pocket expenses).

It's important to note that if your income goes over $90,000 for an individual or $180,000 for a couple, this rebate drops through various tiers until it cuts out entirely at $140,000/$280,000. If your income is over $90,000, your premiums will be higher than the amounts listed below.

The cost of the lowest level, basic hospital cover for a few brands is listed below:

  1. Bupa - $1,144 ($22/wk) for singles, or $2,288 ($44/wk) for couples/families
  2. AHM - $871 ($16.75/wk) for singles, or $1,742 ($33.55/wk) for couples/families
  3. Medibank - $855 ($16.44/wk) for singles, or $1,710 ($32.88/wk) for couples/families

In comparison, the cost of the highest level hospital cover is listed below (this will generally cover all sorts of elective surgeries, joint replacements, pregnancy services etc):

  1. Bupa - $1,756 ($33.78/wk) for singles, or $3,513 ($67.55/wk) for couples/families
  2. AHM - $1,833 ($35.25/wk) for singles, or $3,666 ($70.50/wk) for couples/families
  3. Medibank - $1,629 ($31.32/wk) for singles, or $3,258 ($62.64/wk) for couples/families

Keep these figures in mind - we'll use them to compare to the Medicare Levy Surcharge in a minute.

What happens if I choose not to have it?

There are two different factors to take into account when you're deciding whether to get private health insurance.

Medicare Levy Surcharge - this is calculated based on your income level, so no matter how old you are you will never pay this unless your income goes over the threshold.

Lifetime Health Cover Loading - this is calculated based on your age, but only applies if you do eventually get private health insurance. If you choose to opt out 'for life', this will never apply.

Medicare Levy Surcharge

The Medicare Levy Surcharge was designed by the government to encourage higher income earners to reduce their burden on Medicare by encouraging them to get private health insurance.

If you have eligible hospital cover (with an excess of $500 or less for singles, or $1,000 or less for couples/families), you will never pay this surcharge.

The Medicare Levy Surcharge kicks in at $90,000 of income for a single person, or $180,000 of combined family income for a couple.

It starts at 1% of total income from $90,000 to $105,000 of income (or family income of up to $210,000). From there it moves to 1.25%, and if your income is over $140,000 ($280,000 combined for couples), it moves to 1.5%.

In summary (if you're part of a couple, double these figures and compare to the couples premiums above):

Surcharge payable at $90,000 = $900 - slightly more than the cost of very basic hospital cover.

Surcharge payable at $105,001 = $1,312.50

Surcharge payable at $140,001 = $2,100

In essence - once your income goes over $90,000, it may actually be cheaper for you to hold an extremely basic hospital policy than it would be to pay the Medicare Levy Surcharge.

But, if your income is well below the threshold, the hospital cover will only be for your personal medical wants/needs, and you won't be avoiding any taxes by holding the cover.

Lifetime Health Cover Loading

Lifetime Health Cover Loading is used to encourage people to get hospital cover before they turn 31 - but it only becomes payable if you eventually get a private health insurance policy. The idea is to encourage you to jump in when you're young, by holding the threat of potential penalties over your head if you don't.

Lifetime Health Cover Loading is a 2% penalty payable for every year you didn't have health cover after 30. The penalty is payable on top of your premiums if/when you eventually sign up for health cover, and it's payable for 10 years - at that point the premiums revert to the regular amount.

What does that mean? It means if you decide to get private health cover for the first time when you're 40, you will pay 20% more than a person who's had the cover since they were 30. You'll pay this extra for 10 years, and then your premiums will drop back to being the same amount.

If you get private health cover for the first time when you're 50, you'll be paying 40% more for 10 years. Etc etc.

How Lifetime Health Cover and the Medicare Levy Surcharge interact

Lifetime Health Cover Loading may look scary, but remember that, depending on your personal circumstances, you may save more by not paying premiums before you need them (when you're still young and healthy) than you would eventually spend paying extra premiums because of the loading.

If you take out cover for the first time when you're 40, you might pay an extra $200/year on a basic policy - but you've saved $800-1,000/year on premiums during the time you didn't have cover.

What do I do next?

Remember that it's entirely up to you - this article is just attempting to explain some of the buzz words thrown around by the industry.

You might be entirely focused on your personal budget and the bottom line - and if you don't need to spend the money, you see no point in doing so.

On the other hand, you might decide that you prefer the peace of mind of 'just in case' cover, even though it may cost you more in the short term.

What I'm attempting to do here is give you the tools to make the decision with all the information to hand, and none of the fear mongering being peddled by the private health insurance industry.

Talk to your friends, your family, your loved ones - decide what's best for you and the people in your life. I believe that private health insurance should be a choice entered into based on an assessment of the costs and risks, rather than based on advertising, buzz words and misinformation that often flies around.

If you'd like to discuss your personal circumstances, please feel free to contact me.

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