Health insurance buying guide
We demystify health insurance so you don't pay for cover you're not using.
Should I get health insurance?
We're glad you asked. The good news is, if you're a permanent Australian resident then you already have health insurance, it's called Medicare. For most of us, our Medicare health insurance premiums cost two per cent of our annual salary for 'free or subsidised' access to doctors, specialists, optometrists and treatment and accommodation in public hospitals, plus a few other perks.
"Thanks, smart alec, I already knew that," we hear you say. So let us rephrase...
Do I need health insurance?
Good question – we're glad you asked. But we'd like you to break that question down a bit more because there's really no such thing as "private health insurance": there's private hospital insurance, and there's extras insurance. And we're not just being sticklers here – a lot of people waste good money on one of these insurance types without using it. We don't want you to be one of those people.
Here we explain:
- Private hospital cover
- Extras cover
- Combined cover
- Ambulance cover
- Government loading and surcharges (LHC and MLS)
- Waiting periods and switching
Hospital or no hospital?
Now we're getting down to the nitty gritty. You already have Medicare so why should you take out private hospital insurance?
No private hospital insurance – the good points:
- If you earn less than $90k a year (double that for couples and families) the only financial incentive to get hospital cover is that you will have to pay the Lifetime Health Cover (LHC) loading if you take out hospital cover after you're 31.
- The public hospital system serves people who require emergency surgery well.
- For more complex and expensive medical conditions, you'll end up in public regardless of whether you have private hospital cover or not, because public hospitals have the equipment.
- If you are admitted to public hospital as a public patient, Medicare will foot the doctor's bills.
- But if you're admitted to a private or public hospital as a private patient, you may end up paying a 'gap fee' to your doctor or sometimes even to the hospital. That's the gap between what Medicare and your health fund pays, and what the actual doctor's fee is, and it can run into thousands of dollars.
No private hospital insurance – the bad points:
- For elective surgery you'll end up on a waiting list.
- You won't be able to choose your own doctor.
- You'll be in public hospitals instead of private hospitals (which generally have better conditions and service staff).
- If you earn over $90k a year (double that for couples and family), you'll be charged the Medicare levy surcharge of at least 1% of your income, it steps up to 1.25% and then 1.5% for higher income levels. It's on top of the two percent Medicare Levy everyone pays.
- If you're over 31, and you do eventually decide to get private hospital insurance, then you'll pay more for it in the form of the Lifetime Health Cover loading.
What about extras cover?
Theoretically, the whole idea of paying insurance premiums is to put a financial cap on how much money comes out of your pocket when the unexpected occurs. Rear-ended a Porsche? No problem, pay your $500 excess and the insurer will pay the rest. House burnt down? Pay the excess and the insurer will re-build. Need a new hip? Pay the excess and your insurer will pay the hospital costs, and maybe some of the doctor's fees. OK, in reality it's never as easy as this – but we did say theoretically.
Need to go to the dentist? Your extras insurance will pay the first $200 (for example) and you'll pay the rest. Do you see the difference? The insurer's liability is capped, yours isn't.
For that reason, extras 'insurance' really isn't insurance at all, it's a budget management tool.
Do I need extras cover?
If you're buying health insurance purely for tax reasons, then no. Not having private hospital insurance can mean you pay extra tax and higher premiums should you take it up again, but these penalties don't apply to extras (ancillary) cover.
This type of insurance rarely covers the full cost of your treatment. On average (12 months to March 2017) health funds paid about:
- just over half (55%) the cost for the dentist
- 60% of the cost at the optometrist
- half (52%) of physiotherapy treatments
- over a third (39%) for medicines not covered by the Pharmaceutical Benefits Scheme (PBS)
- a quarter for hearing aids and audiology.
And there are wide variations between funds and policies, too. The most generous health insurance fund for all extras services, for example, refunded 59% on average in 2015–16, while the most miserly health fund covered just 37%. For dental the differences are even greater: the most generous fund pays on average 70% of the costs, the least generous one pays 34%.
According to APRA, average extras benefits during the year to March 2017 were $398 per person. But there are two groups of people who benefit most from extras insurance:
- Families pay the same health insurance premium as couples – or double the singles premium – so children are effectively insured for free. (Tip: Some health funds offer no-gap cover for kids, particularly for dental.) But beware: parents with children under five receive, on average, less than $100 of benefit for their child per year, whereas children aged between 10 and 14 clock up an average benefit of nearly $400 per year – which could have something to do with the high costs of braces (orthodontics).
- People aged 55–79 make the most use of their extras cover benefits, compared to other age groups, and receive an average benefit per person of more than $600.
This is simply hospital and extras combined into one policy. It can be convenient because you only deal with one health fund for both types of insurance. It can also be useful for the health funds because they've just sold you two insurance policies in one go.
Ask yourself these questions before buying a combined policy:
- Do you need both hospital and extras?
- Do you need to get them from the same fund?
It's worth pointing out again: private hospital and private extras insurance are separate types of insurance and a lot of people waste good money on one of these insurance types without using it.
While there are some good combined policies available, you can often get a better deal by buying the best value extras and hospital insurance from separate funds, so shop around to make sure you're getting the best deal.
Ambulance expenses are not covered by Medicare and the extent of coverage by state governments varies. By definition you can't really predict if or when you're going to need an ambulance so it's worth making sure you're covered.
- Queensland and Tasmanian residents are covered by their state government.
- Northern Territory, South Australia, Victoria and Western Australian residents can purchase insurance through a private health fund – it's sometimes included with hospital cover and sometimes with extras so if you purchase health insurance in these states make sure you check that you have ambulance cover, or subscribe to the state ambulance service.
- It's included in private hospital insurance in NSW and ACT but if you don't have hospital cover in these states, check if it's included in extras cover.
Check with your health fund to see what kind of ambulance cover is provided. Some funds only cover ground transport, excluding air ambulance for example, and others may only cover emergency ambulance, for example, excluding transfers between hospitals.
Why do you keep throwing acronyms at me?
Because there's a lot of them. Here's a list of the most important ones:
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, which is actually added as a loading on top of your premium. 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 is no loading for extras insurance.
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.
PHIR – Private Health Insurance Rebate Ok, we made that one up. It's a real thing, but it doesn't normally go by an acronym. A single person earning up to $90k a year (or a couple or family earning $180k) gets a 25.1% (1 April 2019 to 31 March 2020) 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). If you're aged 65 and over you receive a higher rebate.
See our hospital insurance buying guide for the full range of income thresholds for the MLS and Private Health Insurance Rebate.
Waiting periods and switching
- Waiting periods for extras vary per policy: usually it'll be two months for most services, 12 months for major dental and 36 months for hearing aids (what?).
- For hospital cover, waiting periods for pre-existing conditions are generally 12 months.
- If you switch to hospital cover considered equivalent or lower than your existing policy (check with the health fund), the waiting period you served on your previous policy will be carried across.
- But if you upgrade your cover or lower your excess, you will have to serve a new waiting period for the difference in cover.