The Double Whammy of Private Health Insurance Schemes: spiralling costs and reducing tax incentives

Many Australians have private health insurance, partially motivated by avoiding the hefty Medicare levy surcharge (MLS), partially motivated by wanting a better health care service or reducing certain medical related out-of-pocket expense. In December 2016, 46.6% of the Australian population had the private hospital cover. The proportion of the population insured has only changed slightly since 2000 according to the Australian Prudential Regulation Authority (APRA) [link1][link2]. Empirical research suggests many of the taxpayers opted to be insured due to the tax hike around the Medicare levy surcharge threshold in Australia [link].

Health insurance premiums have gone up steadily over the past years. The most recent figure from the Department of Health suggests that the average annual increase of the health insurance premium is above 5.6% between 2010 and 2017, far exceeding the consumer price index (CPI) and the average wage growth rate, as shown in the figure below. The fast growth rates makes health insurance more and more expensive both in real dollar term and in terms of percentage of household income. Moreover, the health insurance rebate (link here), an incentive provided by the government to adopt private health insurance, is declining from 30% in 2010 to 26.79% in 2017 for those under 65 years of age. Additionally, an income threshold was introduced in 2012. It is currently set at $90,000 for singles (double for families).

Over the past decade, private health insurance premiums now far exceed CPI, and this is underpinned by the declining value of incentives to participate in these schemes. Let's consider the evidence in more detail.


Figure 1: Price index of CPI, AWE and health insurance premium (100% in Year 2009)

Assumptions and methodologies

This article uses STINMOD+, a tax and transfer estimation model developed by NATSEM, to estimate the real expense of health insurance. We use the official figures from the Department of Health for changes in the health insurance premium, and the 2016 health insurance price for singles and couples are from the median value reported by Canstar. As most people with private health insurance have a salary close to or exceed the Medicare levy surcharge threshold, we assume 4 different income levels, which are at 100%, 125%, 150% and 200% of the average weekly earnings in our analysis. We model single and couple households separately, assuming all adult family members are working full time at the same wage level. We focus on the working age population in this analysis, so that no one in the household is older than 65. We also assume the health insurance premium will increase at the average pace in 2018 (5.6%) and the wage increase at 2% in the next year. The average full time weekly earning is $1516 ($79049 p.a.) in 2016.

Insurance Premium and Rebate

The figure below shows the typical rebate amount for families at 100%, 125%, 150% and 200% of the average earning level, given a median health insurance premium ($2721 p.a. before rebate for singles, and $5463 p.a. before rebate for couples). As seen, couples with double the average salaries were no longer be able to reclaim any rebate since the reform in 2012. Couples on average incomes receive around $1600 rebate annually, and singles at a comparable income level get half of that.


Figure 2: Health insurance rebate at the median price

Net cost of the insurance premium

The next Figure shows the out-of-pocket private health insurance expense as a proportion of the post-tax income (wage minus the income tax). As seen, health insurance out-of-pocket costs are growing rapidly, and are expected to reach more than 3.5% for households earning an average salary. The ratio is mostly the same for singles and couples alike. Higher income families pay a higher insurance premium out-of-pocket due to the lower rebate and were negatively affected by the policy shifts in the past years, but they have a relative smaller out-of-pocket ratio due to their higher earnings. Given the continuing increase of the insurance premium and the out-of-pocket cost, earners around the average earning level will probably have less incentives to be insured. Some families would have no tax incentives to participate as the Medicare levy surcharge is between 1 to 1.5% of the salary, while the insurance premium can easily exceed that even accounting for the rebate. It would be interesting to observe whether the increasing premium would lead to a decline of the private health insurance participation in the upcoming years.


Figure 3: Health insurance premium as a proportion of after-tax income.


The table below reports the raw calculation results from STINMOD+. Note that the out-of-pocket ratio is defined as the net health insurance premium after rebate as a proportion of after-tax income (earnings minus income tax).

Family TypeIncome TypeYearInsurance Premium ($)Insurance Rebate ($)Out-of-pocket ratio (%)
Couple100% of average income2010$ 3,911$ 1,1732.7
Couple100% of average income2011$ 4,137$ 1,2412.7
Couple100% of average income2012$ 4,367$ 1,3102.8
Couple100% of average income2013$ 4,588$ 1,3772.8
Couple100% of average income2014$ 4,845$ 1,4073.0
Couple100% of average income2015$ 5,146$ 1,4323.1
Couple100% of average income2016$ 5,464$ 1,4643.3
Couple100% of average income2017$ 5,728$ 1,5353.4
Couple100% of average income2018$ 6,049$ 1,6213.6
Couple125% of average income2010$ 3,911$ 1,1732.2
Couple125% of average income2011$ 4,137$ 1,2412.3
Couple125% of average income2012$ 4,367$ 8732.6
Couple125% of average income2013$ 4,588$ 9182.7
Couple125% of average income2014$ 4,845$ 9382.8
Couple125% of average income2015$ 5,146$ 9543.0
Couple125% of average income2016$ 5,464$ 9763.1
Couple125% of average income2017$ 5,728$ 1,0233.2
Couple125% of average income2018$ 6,049$ 1,0803.3
Couple150% of average income2010$ 3,911$ 1,1731.9
Couple150% of average income2011$ 4,137$ 1,2411.9
Couple150% of average income2012$ 4,367$ 4372.6
Couple150% of average income2013$ 4,588$ 4592.6
Couple150% of average income2014$ 4,845$ 4692.7
Couple150% of average income2015$ 5,146$ 4772.8
Couple150% of average income2016$ 5,464$ 4882.9
Couple150% of average income2017$ 5,728$ 5123.0
Couple150% of average income2018$ 6,049$ 5403.1
Couple200% of average income2010$ 3,911$ 1,1731.5
Couple200% of average income2011$ 4,137$ 1,2411.5
Couple200% of average income2012$ 4,367$ -2.2
Couple200% of average income2013$ 4,588$ -2.2
Couple200% of average income2014$ 4,845$ -2.3
Couple200% of average income2015$ 5,146$ -2.4
Couple200% of average income2016$ 5,464$ -2.5
Couple200% of average income2017$ 5,728$ -2.6
Couple200% of average income2018$ 6,049$ -2.7
Single100% of average income2010$ 1,948$ 5842.7
Single100% of average income2011$ 2,060$ 6182.7
Single100% of average income2012$ 2,175$ 6522.8
Single100% of average income2013$ 2,285$ 6862.8
Single100% of average income2014$ 2,413$ 7012.9
Single100% of average income2015$ 2,563$ 7133.1
Single100% of average income2016$ 2,721$ 7293.3
Single100% of average income2017$ 2,853$ 7643.4
Single100% of average income2018$ 3,012$ 8073.5
Single125% of average income2010$ 1,948$ 5842.2
Single125% of average income2011$ 2,060$ 6182.2
Single125% of average income2012$ 2,175$ 4352.6
Single125% of average income2013$ 2,285$ 4572.6
Single125% of average income2014$ 2,413$ 4672.8
Single125% of average income2015$ 2,563$ 4752.9
Single125% of average income2016$ 2,721$ 4863.1
Single125% of average income2017$ 2,853$ 5103.2
Single125% of average income2018$ 3,012$ 5383.3
Single150% of average income2010$ 1,948$ 5841.9
Single150% of average income2011$ 2,060$ 6181.9
Single150% of average income2012$ 2,175$ 2172.5
Single150% of average income2013$ 2,285$ 2292.6
Single150% of average income2014$ 2,413$ 2342.7
Single150% of average income2015$ 2,563$ 2382.8
Single150% of average income2016$ 2,721$ 2432.9
Single150% of average income2017$ 2,853$ 2553.0
Single150% of average income2018$ 3,012$ 2693.1
Single200% of average income2010$ 1,948$ 5841.5
Single200% of average income2011$ 2,060$ 6181.5
Single200% of average income2012$ 2,175$ -2.2
Single200% of average income2013$ 2,285$ -2.2
Single200% of average income2014$ 2,413$ -2.3
Single200% of average income2015$ 2,563$ -2.4
Single200% of average income2016$ 2,721$ -2.5
Single200% of average income2017$ 2,853$ -2.6
Single200% of average income2018$ 3,012$ -2.7