Is private health insurance worth it at tax time? Key costs, penalties and cover gaps to weigh up

As Australians prepare their tax returns and review household budgets, private health insurance often becomes a fresh point of debate. For some people, the question is straightforward: will private cover help them access care sooner, or allow them to choose their doctor? For others, the calculation is driven less by healthcare preferences and more by tax settings that penalise higher-income earners who do not hold eligible private hospital cover.

This year’s decision is landing in a period of rising costs. For around 15 million Australians, private health insurance premiums increased in April after the federal government approved the biggest annual average premium rise in seven years. At the same time, consumers and analysts say many products now include more exclusions and higher out-of-pocket costs than they once did—leaving some policyholders wondering what they are actually paying for.

Whether private health insurance is “worth it” depends heavily on your income, age and health needs. It can also depend on how your policy is structured, what it excludes, and what you would have to pay if you made a claim.

Why private health insurance exists alongside Medicare

Australia’s private health system is designed to complement Medicare and relieve pressure on the public system. People who can afford private treatment are encouraged to use it, in part because it can offer shorter waiting times for elective surgery and provide greater choice of doctor.

Over time, governments have built incentives and penalties into the system with the aim of keeping participation high. The underlying idea is that if more people—especially those who are less likely to make claims—pay into private health insurance, that broadens the risk pool and supports the system’s financial viability.

However, the system is under strain as the population ages. A 2023 report prepared by EY for the federal government found average hospital claims varied sharply by age: for people aged over 75, average hospital claims were over $7,000 per person, while for 40–45-year-olds they were about $850 per person. Longer term, demographic projections suggest nearly one-quarter of the population will be aged 65 and over by 2064–65, increasing demand for health services across both public and private sectors.

Premium rises, reduced benefits and the “value” question

Even as the case for private health insurance is often framed around supporting Medicare and accessing private services, many consumers focus on a simpler question: does the policy deliver value for the premium?

Stephen Duckett, an honorary professor at the University of Melbourne and a former secretary of the federal health department, argues that for young, healthy Australians, private health insurance often provides little value. He points to the emergence of policies that offer minimal benefits but are priced strategically to sit just below the Medicare Levy Surcharge threshold—appealing to people who mainly want to avoid a tax bill rather than use the cover. He describes these as “junk insurance”.

From the consumer perspective, the concern is not only what a policy covers, but also what it does not cover. Greg Jericho, chief economist at The Australia Institute, says the private system struggles because it is not attractive to those who are least likely to need it—yet those people are also the most likely to be profitable for insurers. In his view, private health insurance is generally not a good option for young Australians, except possibly in specific circumstances such as competitive sports where there may be a higher risk of needing procedures like knee or shoulder surgery.

Jericho also points to a shift in product design over time. He says that around 3 to 4 per cent of policies had exclusions in 2000, compared with around 65 per cent now. He also says the share of policies with excess payments has increased from around half to about 85 per cent. The practical effect is that more policies may cover less, and require co-payments if they are used.

The Medicare Levy Surcharge: a tax-time trigger

For many households, the key tax-time issue is the Medicare Levy Surcharge (MLS). The MLS has been in place since 1997 and is designed to encourage higher-income earners to take out private hospital cover. If you earn above certain thresholds and do not have eligible private hospital insurance, you may have to pay an additional tax.

• The MLS ranges from 1 per cent to 1.5 per cent of income.
• It applies once individuals earn above $97,000, or couples/families earn above $194,001.

Duckett describes the MLS as a “strange concept” for a private market because its purpose is to push people into buying a product many will not use, in order to improve the overall risk pool.

There are several practical details that can catch people out:

• Your MLS liability can depend on whether your spouse and any dependent children have private hospital cover.
• The surcharge is calculated when you lodge your tax return, rather than being automatically handled through employer withholding—so it can reduce a refund or increase a tax bill.
• It is based on the number of days you hold cover during the financial year, meaning partial-year cover may still leave you owing some MLS.

People can estimate their MLS using the Australian Taxation Office calculator. For those close to the income thresholds, this can be an important step before deciding whether to buy cover late in the financial year or to wait.

Lifetime Health Cover loading: the age-based penalty

Another policy that shapes decisions is Lifetime Health Cover (LHC) loading. Introduced by the Howard government, LHC loading penalises people who do not take out private hospital cover by age 31. The loading increases premiums later for those who join after that age.

• The loading is 2 per cent for every year a person does not have cover after age 31.
• It is capped at 70 per cent.
• It is removed after 10 years of continuous cover.

Choice insurance analyst Mark Blades says LHC loading often catches people off guard in their 40s. As an example, he notes that a 41-year-old taking out private cover for the first time would face a 20 per cent loading on their premium.

But Blades also argues that, in many cases, it can work out better to pay the loading later when you actually need health insurance, rather than paying for a basic policy for years just to avoid the penalty. His reasoning is that basic cover can be overpriced for what it provides, because you may receive “very, very little” in return.

For some people, the interaction between the MLS and LHC creates what Jericho calls a “double whammy”: once you are over 31 and earning above $97,000, you may face the MLS if you do not have hospital cover, while also potentially facing lifetime loading if you delay joining.

The private health insurance rebate: a subsidy that varies by income and age

Private health insurance is also influenced by government support through the rebate program. The government contributes about $7.5 billion each year to subsidise private health insurance premiums via this rebate.

The rebate is means-tested and depends on income and age. It ranges from about 8 per cent to 32 per cent. However, higher-income earners are not eligible:

• Individuals earning more than $151,001 are not eligible.
• Couples earning more than $302,001 are not eligible.

The rebate has been progressively reduced in recent years, reflecting rising medical costs and population ageing. It is indexed, and it fell last year by a few percentage points. It dropped again this year from 24.6 per cent to 24.3 per cent.

For consumers, the rebate can change the effective cost of a policy, but it does not necessarily resolve the underlying question of whether the cover is usable and adequate for their needs.

“Junk” policies and why cheap cover can still cost you

One of the most common tax-time strategies is to consider a low-cost hospital policy purely to avoid the MLS. Blades says people earning above the threshold can take out a cheap policy to save a couple of hundred dollars, but warns it may be “a product you can’t really use”.

Even if a basic policy meets the technical definition required to avoid the MLS, it may come with limitations that matter when you need care. Key issues include exclusions, waiting periods, excess payments and additional fees.

Blades says that if you actually use a cheap hospital policy, you could still face substantial out-of-pocket costs, including:

• An excess payment—often about $750 for basic cover.
• Gap fees, depending on the services and how providers charge.

Jericho argues that many people do not see “actual value” in private health insurance and are taking it out mainly to avoid penalties. That dynamic can encourage the growth of minimal policies designed around tax settings rather than healthcare needs.

What to check before you renew, downgrade or drop cover

Because the MLS is assessed at tax time and LHC loading can affect future premiums, many people review their cover in the lead-up to the end of the financial year. But decisions made quickly can have longer-term consequences, especially if you later need a higher level of cover.

Consumers should consider reviewing the details of what they are paying for. There are services, including government-provided comparison tools, that allow people to look up the details of what a policy covers and compare options across insurers. One document that can help is the Private Health Insurance Statement, which outlines key features of the cover.

When comparing policies, factors worth weighing up include:

• Waiting periods: these can apply when you start a policy or upgrade to a higher level of cover.
• Exclusions: services not covered at all under the policy.
• Excess and co-payments: what you may have to pay if you are admitted to hospital.
• Bundling requirements: some policies may require you to take out extras cover as well as hospital cover.

It is also worth understanding the practical barriers to switching. The industry can make it difficult for people to drop a policy and later pick up a new one, particularly for top-tier cover, due to issues such as waiting periods and the loss of unused benefits.

Tax return timing: why the surcharge can surprise people

Because the MLS is calculated when you lodge your return, it can arrive as an unpleasant surprise—especially for people who assumed their regular payroll withholding had covered their tax obligations. The surcharge can reduce an expected refund or create a tax bill, depending on your circumstances.

Another complication is that MLS liability is calculated based on the number of days you held eligible cover during the year. That means buying a policy late in the financial year may not eliminate the surcharge entirely.

For households with changing circumstances—such as a new relationship, separation, or changes to dependent children—understanding how family status and cover arrangements affect MLS can be important.

Balancing personal healthcare needs with policy incentives

Private health insurance decisions sit at the intersection of personal health needs and policy incentives. Some people value the ability to access elective surgery sooner or choose their doctor. Others may be primarily responding to tax penalties, particularly the MLS, or thinking ahead about LHC loading.

Duckett acknowledges there are “a lot of benefits and a lot of strengths” in the private system, but the experience of rising premiums, higher excess payments and more exclusions has made the value proposition harder for many people—especially younger Australians who may not expect to claim.

At a system level, the pressure of an ageing population adds complexity. Older age groups tend to claim more, which can push up costs. Meanwhile, if younger and healthier people opt out, that can further strain the risk pool—one of the reasons policies like the MLS exist in the first place.

A practical checklist for tax time decisions

If you are weighing up whether to take out, keep, downgrade or switch private hospital cover around tax time, these questions can help structure the decision:

• Is your income above the MLS threshold for individuals ($97,000) or couples/families ($194,001), and would you pay 1–1.5 per cent of income without eligible cover?
• How many days in the financial year will you hold cover, and how might that affect your MLS calculation?
• Are you over 31, and if so, what LHC loading might apply if you join later?
• Does the policy you are considering have exclusions that would make it hard to use for the care you might actually need?
• What excess would you pay (often around $750 for basic cover), and could gap fees apply?
• Are you eligible for the private health insurance rebate, and if so, what percentage applies based on your income and age?

Ultimately, the “worth it” question is not only about avoiding a tax penalty. It is also about whether the product you buy provides meaningful protection when you need it, or whether it is primarily a compliance cost shaped by incentives and penalties.

Disclaimer: This information is general in nature. If you need personalised advice, consider speaking with a qualified professional.