Why your extras health cover policy is losing value

Watch out for the 'lazy tax' on extras cover.

Less for more

Extras health insurance premiums are continuing to increase, but the amount that members can claim for individual items has failed to keep up.

Insurers blame the rising cost of health care and the cost of servicing an increasing number of claims (more people claiming more often) for the price hike.

But the people with policies that have "set benefits" – as opposed to "percentage benefits" – are the ones missing out. Our analysis found that set benefits have not increased over the years, and if your benefits aren't keeping up with the CPI or your premiums, then your extras policy is losing value every year.

In this article we look at:

Set and percentage benefits

Extras cover isn't insurance in the traditional sense of the word, where you buy it "just in case" something happens. It's more of a budgeting tool, which you can use to reduce the cost of dental and allied health services – not dissimilar to a book of discount vouchers.

Health funds cap these discounts in one of two ways. You could receive a percentage of your bill back, up to a point – the most common percentage benefit is 60%. Or, there could be a set dollar limit on how much you can claim. When you go the dentist, for example, every item on the bill will have a value cap assigned by the health fund, regardless of what the dentist charges. Here are two examples, taken from the Standard Information Statements available for all policies at privatehealth.gov.au:

Percentage benefits

Cover Waiting period (months) Benefit limits (per 12 months) Examples of maximum benefits
General dental None $400 per person Periodic oral examination – 70% of charge
Scale and clean – 70% of charge
Fluoride treatment – 70% of charge
Surgical tooth extraction – 70% of charge

Percentage benefits: The above policy will pay 70% of all general dental charges up to an annual limit of $400.

Set benefits

Cover Waiting period (months) Benefit limits (per 12 months) Examples of maximum benefits
General dental 2 $500 per person Periodic oral examination – $26.00
Scale and clean – $43.60
Fluoride treatment – $14.20
Surgical tooth extraction – $107.60

Set benefits: This policy pays a set amount for each treatment, up to an annual limit of $500. The higher overall benefit limit might make this one appear more attractive, but if your dentist is expensive, you might find it easier to claim the full amount for the percentage benefit policy. Source: PHIO.

About half of all policies have a mixed benefit model: dental therapies might come with a percentage benefit, for example, while other services like physiotherapy have a set dollar benefit per visit. Percentage benefits can add to the cost of a policy, but it means if you go to a more expensive dentist, you can claim more back.

Doing less for more

On the whole, health funds are covering more of our medical bills than in previous years. In 2010 extras customers claimed back 48.8c for every dollar they spent on medical fees; in 2016 that had climbed to 53.1c. It may not seem like much, but on average that amounts to an extra $91 per insured person paid in benefits.

But not all extras customers are sharing these benefits equally.

CHOICE analysed 19,790 extras policies1 that have been available for over one year, and found that in almost every case the set benefits included in extras products weren't keeping up with premium increases, or with the growing cost of health care. Stagnation was the rule, not the exception. 

To test this we chose 15 benefits2 from the range of services covered by extras, then compared the benefit amount each policy paid in 2016 to the amount from 2013 (or the year the product was launched, if that was later). About 250,000 individual benefits were identified, which we narrowed down to about 162,000 set benefits. We then looked at each policy's premium growth over the same period, to see whether any increases to benefits kept up with any premium price hikes.

The results were surprising in how consistent they were across the industry. Barely one in 20 set benefits policies actually kept up with the premium increases. And there were no policies where all the set benefits we looked at actually kept pace with price growth.

In just over one in 10 cases the health funds did increase some benefits – not every year, although a product was more likely to see some sort of increase if it had been around longer. If we look at only the policies that were launched in 2013 or before, after three years 72% of set benefits hadn't changed at all. In the same three-year period, private health insurance premiums increased by 19% on average.

1 The Private Health Insurance Ombudsman separates individual product lines into several iterations depending on the location it's sold, the number of adults and dependants it covers, and whether it's standalone cover or combined with hospital cover – all factors which determine cost. A single extras product might actually have a couple dozen iterations. Don't worry, there aren't actually 20,000 products on sale for you to choose from – it's closer to 300. 
2 We considered benefits paid for a periodic oral exam; scale and clean; fluoride treatment; surgical tooth extraction; a full crown veneered; root canal treatment; a full course of orthodontics; single vision lenses and frames; multifocal lenses and frames; hearing aids; blood glucose monitors; initial visits for physiotherapy, chiropractic, podiatry, and psychology. 
Set benefits are not increasing at same rate: read an accessible text-only version of this infographic.

So why do premiums keep going up?

Health funds routinely point at the increasing cost of health care when it comes to premium hikes. And because more people are claiming more often, health funds say they need to increase premiums to meet costs. CHOICE asked health fund GMHBA about a policy which had seen a 33% premium increase since 2013. It came with a combination of set and percentage benefits, but none of the set benefits had increased in three years. CEO Mark Valena said the price hikes came from the cost of servicing those percentage benefits.

"Platinum Extras was subject to adverse selection3 due to the cover offering high annual limits with 80% back at any provider (across a select number of services). As a result, the product was subject to greater inflationary pressures and was closed in 2014 when we introduced a new suite of mix and match covers," said Valena.

"While we recognise our benefits for dental have not increased over time (due to the set benefit amount paid on dental), benefits across other services have increased in line with inflation due to the high percentage back rebates."

Valena also noted the effect the decreasing private health insurance rebate has on driving up premiums. 

For policies that only offer set benefits, health funds don't have the same explanation to fall back on. Several closed (but still operating) policies offer nothing but set benefits, none of which had changed in three years. We asked the health funds offering them what accounted for premium increases in this case.

When asked whether Medibank's Blue Ribbon Extras policy continued to offer value (it had seen up to 16.5% premium growth since 2013 and no change to set benefits), a spokesperson told CHOICE: "We recognise that affordability is a key concern for private health insurance customers, which is why we have improved the value of our Blue Ribbon Extras policy this year." 

They said extras customers get value from bonuses that aren't listed on Standard Information Statements, including two free dental check-ups a year at Medibank-preferred providers, and an extra $50 benefit ($100 for couples and families) to cover out-of-pocket costs.

A spokesperson for nib said: "Any changes in price reflect nib's annual review of our health covers which considers both the claims inflation experienced by each product as well as our desire to continue to provide our customers with the level of cover they want." 

The spokesperson also noted that nib had moved toward products which offered only percentage benefits, and that they encourage customers to regularly review their level of cover.

3 The tendency of high-risk customers to seek insurance with high benefits (and pay more for it).

Don't get caught by the 'lazy tax'

At CHOICE we love to warn people about the 'lazy tax' – the extra money people spend when they don't bother to shop around for a cheaper insurance policy, phone plan, or mortgage provider. When it comes to extras cover, if your policy includes lots of set benefits, this is another way you could be paying. The CPI for health services increases roughly five percent a year, so if your benefits aren't keeping up with the CPI or your premiums, that means your extras policy is losing value every year.

So you're saying I should avoid set benefits?

Not exactly. And they can be hard to avoid entirely, unless you're happy to shell out for a policy that offers percentage benefits on all services. You can still get value from a set benefit policy – indeed in some cases it might be easier to, since their typically lower premiums offer a lower claims target to aim for.

In and of themselves, set benefits aren't bad. Policies with set benefits have been included in CHOICE's list of recommended products in the past. It's only when you stick with the same policy for several years, watching your premiums climb and your benefits stagnate, that you can start to get ripped off.

How to avoid spending more for less

  • If you're one of the 11.3 million Australians with a combined hospital and extras policy, consider splitting them. Ask your health fund what the actual premium is for your extras component, and see if you can find a better deal on a standalone policy. Remember that there often isn't any financial benefit to buying a combined policy. 
  • Choose an extras policy that offers a percentage benefit for all the services you use. You might have to pay a bit more, meaning you'll have to make more or larger claims in order to get your money's worth. But because the health fund pays a proportion of your bill, you're likely to get more value out of it over time.
  • If that option is outside your budget, take a cheaper policy – but make sure you keep an eye on premium increases. You'll have to shop around for a new policy every year or two, because your benefits just aren't going to keep up with the price hikes.
  • It can be worthwhile ditching the couple's policy for two single policies. That way you can shop around for extras that suit you both individually – just as you don't necessarily wear each other's clothes, you don't need to have the same health cover.
  • Ask if you really need your extras cover. If you find yourself paying more in premiums than you get back from the health fund, you're throwing away money. Look into a cheaper policy, or one that offers good benefits for the specific things you require. Or simply think about getting rid of it altogether.

Want to find out if you can save on health insurance? Take our Do I need health insurance quiz.