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To cover or not to cover?

Media Release
29 Aug 2014

Private health insurance. It can be a minefield to navigate and a big decision for many people. Hospital, extras or both? Which fund? What do all the rebates, thresholds and surcharges mean? Here we look at what the future holds for the industry, recent legislative changes, and how advisers and their clients can make the most out of this important investment into health and wellbeing.

A question of money?

Jean is 56, single, and has limited private health cover. She has always enjoyed good health, pays special attention to her fitness and prides herself on rarely needing to see a doctor. However, in the past year Jean’s teeth have been causing her problems and one of her knees needs to be replaced following years of running, limiting her active lifestyle.

Cost does tend to be the biggest factor for most people considering taking out private health insurance, and according to the National Health Survey 58 percent of Australians who don’t have cover say it’s because they can’t afford it.[1] However, more than 57 per cent of the population aged 18 or over have still chosen to take out private health insurance of some kind.[2] 51.8 percent of those people cited ‘security, protection and peace of mind’ as their primary reason for having private health insurance, followed by ‘allows treatment as private patient in hospital’ (28.5 percent).[3]

Unfortunately, Jean suddenly discovered both of those reasons applied to her situation. She has received quotes for major dental work that run into thousands of dollars, much of which her health insurance won’t cover. Her limited health cover also means she faces a long wait before she is able to have the knee surgery.

In less than four decades a projected 46 percent of all Australian government spending will be on health and ageing

An unsustainable model

Driven by an ageing population and increasingly expensive healthcare products and services, in less than four decades a projected 46 percent of all Australian government spending will be on health and ageing[4], meaning health inflation is rising consistently faster than the rest of the economy. And annual private health insurance premium increases, which are controlled by the Australian government, have failed to keep pace with health inflation over the past seven years.

The recent National Commission of Audit acknowledged this problem, saying, ‘Health care spending represents the Commonwealth’s single largest long-run fiscal challenge, with expenditure on all major health programs expected to grow strongly to 2023-24 and beyond. At a practical level, increased health spending reduces resources for other key areas.’[5]

The Commission also concluded that significant opportunities exist to improve the operation of Australia’s private health insurance system, which could help rein in health spending.

Extreme insurance

Rohan Mead, Group Managing Director of Australian Unity (Australia’s sixth largest health insurer) says private health is one of the more ‘extreme’ forms of insurance in terms of its premiums-to-claims ratio, and the big picture outlook for the sector is economically interesting. An average 87 percent of revenue is paid out in claims, leaving just 13 percent for all administration, sales and other overhead and marginal costs.[6]

‘The problem is even more acute, not just because of the demographics but also because the medical industry’s disease profile has broadened out, as has the “intervention profile”—meaning we now treat more ailments more frequently,’ says Mead. ‘We know a sustainable private health insurance industry remains a critical part of an overall health system, given the role it plays particularly in areas such as cancer treatment and joint replacement surgery.’

Mead says the future sustainability and success of the industry lies in innovative product development, and that preventative health care is a crucial path to lowering health bills, both nationally and individually.

Medibank floats

With 3.7 million Australians currently covered by Medibank Private, one thing is certain—the listing of the nation’s largest private health insurer doesn’t face an awareness challenge. Not since Telstra floated in 1997, when 1.8 million Australians bought into the telco, has the listing of a government business garnered as much interest.

Australia’s appetite for direct shares also shows no sign of waning. Nearly six million of us own shares, which ranks our ownership rate as one of the highest in the world.[8] It stands to reason that the government has plenty to gain by this listing, and will be interested in making this offer as compelling as possible for potential investors.

Understanding recent changes

One thing that does help with the rising cost of health insurance is the Australian Government rebate on Private Health Insurance, though that assistance has been whittled away in recent years. On 1 July 2012 this rebate became income tested, meaning it is affected by a variety of factors—including a person’s age, income and the number of children covered under the policy. At that time, though, the rebate increased by the same proportion as the price of the cover.

However, on 1 April 2014 new calculations were introduced. The rebate is now linked to the rate of inflation and the industry average price increase, rather than being a fixed percentage. This change applies to all Australian health funds, and means the value of the rebate will actually decrease over time. A person’s rebate entitlement will also continue to be based on their age and income.

The table below shows how rebates are calculated, both before and after the 1 April changes.

Private health insurance rebates

Private health insurance rebates

Source: Australian Government Department of Health

Note: Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first. These thresholds increase annually on 1 July, based on growth in the Average Weekly Ordinary Time Earnings. Rebate levels change annually from 1 April, based on the Rebate Adjustment Factor. This table refers to income for the purposes of the Medicare Levy Surcharge—refer to the Australian Tax Office calculator for further information.

The government recently released the updated private health insurance rebate and Medicare levy surcharge income thresholds, which will take effect as of 1 July 2014. However, as part of the recently released federal budget, the government has proposed freezing both the income thresholds and rebate percentages for three years from 1 July 2015[7]—meaning income thresholds will likely be adjusted again on 1 July 2015 but then fixed for three years, and rebate percentages adjusted on 1 April 2015 and then also fixed for three years.

Stay tuned, though—as with many budget measures, these changes are yet to receive support from the Senate.

Knowledge is power

As this shows, private health insurance can get complicated. It’s important for financial advisers to discuss this important investment with their clients as part of the initial fact-finding exercise or regular review. Here are some tips to get the most out of health insurance:

  • Review your policy. If you’ve had the same policy for many years, chances are you’re paying for things you don’t need. You might find you’re still covered for pregnancy when your kids have all moved out of home! There are also some legacy health covers still in the market that may mean older people in particular can be paying more than they need to—for example, they may be charged a daily levy for each night spent in hospital on top of their excess.
  • Make sure you’ve registered the correct income threshold. To receive the maximum government rebate on private health insurance, you need to nominate an income threshold, or tier, based on the amount you earn. Avoid a nasty surprise at tax time by ensuring your selected tier reflects your current income. You can make changes to your tier at any time during the year if your circumstances change.
  • Check your ambulance cover. Many people fall into the trap of believing private health insurance covers all ambulance travel, but in fact it will often only apply to an emergency ambulance—and that depends on how the state ambulance service categorises your medical condition. Cover also varies from state to state, including where the accident or emergency occurs as well as where you are insured.
  • Consider your excess. If you’re looking to save money, there are options to pay a higher excess to reduce your premium. Just remember you’ll need to be prepared to pay the excess if you do go to hospital.
  • The longer you wait, the more you’ll pay. In 1999 the government introduced Lifetime Health Cover, which is a two percent loading on private health insurance premiums for every year that a person over the age of 30 is without private hospital cover (up to a maximum of 70 percent). If you are a high income earner, you’ll also pay the Medicare Levy Surcharge for every day you don’t have private health insurance.

The hope, of course, is that people live a long and healthy life and won’t need the protection that private health insurance provides. But the reality is that almost everyone will benefit from health cover—be it sooner or later.

Australian Unity offers a number of health covers suited to different life situations. Visit our website, contact your BDM or call 13 29 39 for more information.


  1. Australian Health Survey: Health Service Usage and Health Related Actions, Australian Bureau of Statistics, 2011-12
  2. ibid
  3. ibid
  4. Long term funding of health and ageing: The rising pressures on commonwealth and state budgets, commissioned by the Business Council of Australia, prepared by Deloitte Access Economics, 2013
  5. Towards Responsible Government, The Report of the National Commission of Audit Phase One, Commonwealth of Australia, February 2014
  6. The Operations of Private Health Insurers, PHIAC Annual Report 2012-2013, Australian Government
  7. Pausing indexation of some Medicare Benefits Schedule fees and the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds, Budget Paper No. 2: Budget Measures, Part 2: Expense Measures, Australian Government, 2014/2015
  8. Australian share ownership study, Australian Stock Exchange, 2013

Important information

Australian Unity Health Limited ABN 13 078 722 568 is a related entity of Australian Unity Funds Management Limited ABN 60 071 497 115 AFSL 234454.

Any examples or information provided in this article are for illustrative and discussion purposes only and do not represent a recommendation or Australian Unity’s view on future events, and in no way bind Australian Unity.

Australian Unity Funds Management Limited ABN 60 071 497 115 AFSL 234454 and Australian Unity Property Limited ABN 58 079 538 499 AFSL 234455 (together, ‘AUI’) grant to professional financial advisers who have received this article from AUI a non-exclusive, limited licence to reproduce content from the article, strictly on the following conditions: The reproduction must only be for use in the financial adviser's practice newsletters and similar publications. The content must not be altered in the reproduction, in any manner which may change or has the potential to change its original meaning or message, or in any manner which may, in AUI's opinion, reflect unfavourably on, or misrepresent, AUI. AUI must be acknowledged in the reproduction by using the following notice: ‘This article originally appeared in Australian Unity Investments’ Insights newsletter dated <date>. Reproduced with permission of Australian Unity Investments. For further information, visit’ If any of these conditions are not in AUI's opinion complied with, then AUI may terminate this licence by written notice to the financial adviser.

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Penelope Bold

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