Junk health cover funded by the taxpayer

Health insurance is heavily subsidised, but should we expect more in return?

$6.5 billion per year spent on health insurance rebate

  • Private heath insurance helps to fund vital health treatments and keeps public hospital waiting lists in check
  • But junk health insurance policies can cost more than basic cover, and don't provide relief for public hospitals 
  • CHOICE is calling for an end to tax concessions and rebates on junk policies as they offer little value

This might make you feel a little sick: you'll keep paying for private health insurance even if you drop it or didn't have it in the first place. The Australian Government uses $6.5 billion of taxpayer money to pay a rebate on the health insurance premiums for most of the 55% of Australians who have private health insurance.

You could argue that this is money well spent, as private heath insurance helps to fund vital health treatments and to keep public hospital waiting lists in check.

"Private health insurance is a critical element of Australia's healthcare system," says Dr Rachel David, CEO of Private Healthcare Australia (PHA).

"It pays benefits for close to two-thirds of non-emergency surgery in Australia, 90% of day admissions for mental health care and 50% of all mental health admissions," she says. "Seventy percent of joint replacements, 60% of chemotherapy and 88% of retinal procedures take place in the private health sector."

She adds that almost half (47%) of adult health fund members are on taxable incomes of less than $50,000, so could ill afford losing the nearly 26% rebate on their health insurance premiums (available to singles earning up to $90,000, and families and couples earning up to $180,000 – for all rebate amounts see our hospital insurance buying guide)

But what about health insurance policies that are bad value or provide very low cover and, therefore, don't do what private health insurance is designed to do: provide relief for public hospitals?

This article also looks at the different types of junk health insurance, why consumers are shifting toward cheaper policies with low cover, and whether you really need private cover for accidents.

What hospital policies are bad value, or 'junk'?

CHOICE has found three types of hospital policies that are bad value for consumers:

  1. Private hospital policies that only provide cover for a very small number of procedures such as accidents, wisdom teeth removal, appendix surgery, knee investigations and reconstructions – all other services and illnesses are excluded or only covered in a public hospital.
  2. Private hospital cover for accident and ambulance only – all other services and illnesses excluded or only covered in a public hospital.
  3. Public hospital policies that only provide cover in a public hospital – while you can choose your own doctor you'll have to join public hospital waiting lists.

They usually don't cover treatments in private hospital for the most common serious diseases, like cancer, stroke or heart disease, and won't give you access to private psychiatric facilities in case of a mental illness.

The benefits these health policies do provide are in many cases questionable, for example:

  • Accident cover can expire before treatments are finished.
  • The surgical removal of wisdom teeth can be more expensive than if you'd had it done by a dentist.
  • Waiting lists in public hospitals may prevent you from ever using the cover: they can range up to one year for procedures such as hip and knee replacements and cataract surgery.
  • Places for therapies like rehabilitation and psychiatric care can be in short supply in public hospitals. So if you only have junk insurance you might not be able to get the treatment you need when you need it.

All three types of policies don't do what private health insurance is designed to do: provide relief for public hospitals.

Do you need health insurance? Take our quiz to find out.

Consumers shifting to low cover policies

The latest annual private health insurance report by the ACCC released in July 2017 found that consumers are shifting toward cheaper policies with low cover.

PHA's David says that younger people make an informed choice to take out these lower cover products, and that many eventually upgrade when their circumstances change.

But at the same time that more and more consumers have low-cover policies, complaints to the Ombudsman are increasing. The ACCC says that consumers are having trouble understanding their own health insurance policies, and notes that the Ombudsman says the main issue of "consumer concern relating to benefits was hospital policies with unexpected exclusions and restrictions.

The report gives the example of a woman who complained unsuccessfully to the Ombudsman when she found herself without cover for surgery after an accident because her policy required her to go to emergency within 24 hours. She had gone to her GP first for a referral to a specialist.

Leanne Wells, CEO of the Consumers Health Forum (CHF), is concerned that the government's rebate on these policies doesn't provide value for money for the taxpayer. "We have argued for raising the minimum coverage of policies that attract the rebate to try to deliver on value for taxpayers and making sure private health insurance is a health product rather than a tax avoidance measure," says Wells.

Not only are these policies bad value for the taxpayer, some of the most popular junk policies can cost more than basic cover policies.

"These toxic products account for around 13% of all policies on the market and while comparison sites and the funds may spruik them as a cheap way of avoiding LHC loading or the Medicare Levy Surcharge, we believe there are better options for the consumer," says CHOICE director of communications, content and campaigns Matt Levy.

Do you need health cover for accidents?

At first look, if you're young and healthy, accident cover sounds like it makes sense since it gives you the option to use the emergency departments of private hospitals. But keep in mind that Medicare fully covers your treatment in the emergency departments of public hospitals, and you should always check the fine print – you may get less cover than you think.

"Some policies only cover you if you go to emergency within 24 hours. So if, after a sports accident, you go to bed hoping it will get better or get an appointment at your GP first, you may miss the deadline," explains Richard Glenn, deputy Commonwealth Ombudsman. "Subsequent treatment can be restricted to 90 days, so if you break your leg and get pins and screws inserted allowing it to heal, you might not be covered if they get taken out six months later."

In many cases, these policies are not even the cheapest ones to buy. So even if your only reason to buy them is for tax reasons, you're getting a bad deal. 

Health insurance reforms needed

We're calling for reforms to the health insurance market that would put power back in the hands of consumers:

  • Make it easier to switch health insurance: many consumers want to switch but very few actually do – one reason is the paperwork you need from your old fund. We ask that consumers receive all that paperwork automatically with the rate increase letter and that this information is made much clearer.
  • Better comparison data – while a standard fact sheet exists that should allow you to compare different policies side-by-side, there are information gaps and health insurers often don't display the fact sheet prominently on their website.
  • The government should carefully consider dropping the private health insurance rebate and/or exemption from the Medicare Levy Surcharge for junk health insurance policies. "This should not be approached as simply a savings measure, but as a means of increasing the value of private health insurance, and making quality health care more accessible and affordable for all Australians," says CHOICE head of media, Tom Godfrey.

Read our top tips on how to save on health insurance.

CHOICE verdict

Health insurance is one of the most confusing markets for consumers. We should be able to expect that in return for the taxpayer-funded subsidy they receive, policies should provide a reasonable level of cover and insurers should provide standardised, comparable information about policies clearly setting out what's covered and what's not.

Junk policies have emerged in response to the Medicare Levy Surcharge and Lifetime Health Cover, where consumers will achieve tax savings by buying hospital insurance whether or not it provides good value for their own health care, the public health system and the community more broadly.

CHOICE is calling on the federal government to end tax concessions and rebates on junk insurance policies as they offer little value to consumers. "Given the primary purpose of these rebates is to reduce pressure on the public system, it's absurd that they can be used to fund policies that more or less leave holders as reliant on the public system as those who don't have insurance," says Levy.

More information about health insurance

Jargon buster

LHC – Lifetime Health Cover (loading)

This is a government levy for people who don't have private health insurance once they turn 31. It's designed to get people to take out private health insurance early in life, and to keep it. For every year you don't have Hospital insurance on 1 July following your 31st birthday, you'll pay two percent of your premium to the government at tax time. It can add up to 70% and applies for the first 10 years of your hospital cover – after 10 years of continuous cover the loading will be removed. It doesn't apply for people born on or before 1 July 1934. Note: you only need Hospital insurance – there's no loading for extras insurance. Also it may work out cheaper to start a savings plan than take out Hospital insurance to avoid the loading – see how to pay the LHC and save.

MLS – Medicare Levy Surcharge

This is a surcharge the federal government charges 'high income earners' at tax time (on top of the Medicare Levy) if you don't have private hospital insurance (again, this only applies to Hospital insurance, you don't need Extras to avoid this). If you're single and earning up to $90k (double that for couples and families) you're exempt, but above $90k (or $180k for couples and families) it steps up to 1%, 1.25% then 1.5% depending on your income. Your private hospital insurance can only have an excess of $500 or lower (double for couples/families) to be exempt from the MLS. Note: there's no cap on co-payments.

Private Health Insurance Rebate

A single person earning up to $90k a year (or a couple or family earning $180k) gets a 25.4% (1 April 2018 to 31 March 2019) rebate on their private health insurance premium (Hospital and Extras). For those earning above $90k, the rebate steps down incrementally until it reaches 0% for people earning over $140k (families or couples earning over $280k).

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