Introduction
For many Australians, the decision to take out private health insurance mainly comes down to wanting financial protection for themselves, their family or for their future – such as getting private cover for obstetrics to start having kids, or upping their policy tier to include more services as they enter their golden years.
But there’s also a portion of the population who get covered because they want to avoid paying the Medicare levy surcharge (MLS) – a tax penalty that applies to high-income earners without private hospital cover.
While Basic health insurance might seem like an attractive way to avoid the surcharge, the real question is: is getting Basic health insurance solely to dodge the MLS a smart financial decision, or will it actually end up costing you more in the long run?
What is the Medicare levy surcharge (MLS)?
In short: it’s a tax imposed on Australians earning over a certain income threshold who don’t have a private hospital insurance policy. The MLS was put in place to encourage higher-income individuals to take up private health insurance and thus ease pressure on the public healthcare system.
For the 2024–25 financial year, the MLS applies to singles earning more than $97,000 per annum and couples or families earning more than $194,000 annually. The surcharge is calculated as a percentage of your income, and the higher your earnings, the higher the surcharge rate:
- Individuals earning between $97,001 and $113,000 and families earning between 194,001 and $226,000 pay a 1% surcharge.
- Singles earning between $113,001 and $151,000 and families between $226,001 and 302,000 are charged 1.25%.
- For singles earning over $151,001 and families exceeding $302,001, the surcharge rises to 1.5%.
For high-income earners, avoiding the MLS seems like a no-brainer. But it’s important to understand that simply taking out a Basic health insurance policy – while effective at eliminating the surcharge – might not give you the protection or value you really need.
The problem with Basic health insurance
While Basic hospital cover will help you dodge the Medicare levy surcharge, it’s probably not what you have in mind when you image comprehensive health cover. In fact, Basic health insurance policies are very limited in what they do cover. Here’s why:
- Minimal protection: Many Basic policies only include ambulance cover and a few restricted (but essential) services, meaning they give you very little bang for your buck – especially if you actually need hospital care. Some of these services might also only have partial coverage, which leaves you out-of-pocket to foot most of the bill.
- Ambulance cover isn’t always needed: If you live in Queensland or Tasmania, ambulance services are already covered by the state government. That means paying for a policy that mainly covers you for ambulance costs isn’t going to be of any real value.
- Cost vs cover: A recent Sydney Morning-Herald article revealed that a 30-year-old earning less than $93,000 would pay around $78 a month for a Basic policy with a $750 excess in 2023. However, for just a little more – $91 a month for a Basic-plus policy or $98 a month for a Bronze hospital policy – you could get much better cover for a wider selection of services. Yes, they are slightly more expensive options, but they could include procedures like tonsil removal, gynaecology, hernia surgeries and more, which are fairly common treatments that you are unlikely to find in any Basic plan.
Key takeaway: Basic health insurance offers very little value for the price. While it will definitely help you avoid the MLS, it can leave you exposed to high out-of-pocket costs whenever you need real medical care.
The drawbacks of relying on Basic health cover
Many Australians are unaware of just how limited Basic health insurance policies can be. Sometimes they might buy these plans to avoid penalties, whether it’s the Medicare levy surcharge or the Lifetime Health Cover (LHC) loading, but don’t actually realise the limitations of their cover until they need it. Here are a few common drawbacks:
1. Limited hospital cover
Basic health insurance usually only covers a small selection of essential hospital treatments. Things like joint replacements, cardiac surgeries and maternity services are excluded or, in rare cases, offered but with very restricted benefits. This means if you need anything more than the most basic hospital treatment, you’ll probably be left to pay big out-of-pocket expenses on your own.
2. Potentially higher excess
If you choose a Basic policy, odds are you’re not keen on paying super-high premiums for your health insurance. In this case, you might decide to save money by going for a high excess. While that means your premiums will be lower, if – and more likely when – you actually need hospital treatment, you’ll be on the hook to pay a large portion of the bill yourself.
3. Ambiguity in what’s covered
The tiered system (Gold, Silver, Bronze and Basic) was introduced to make comparing health insurance plans easier, but many insurers also have ‘plus’ policies that can complicate things. A Basic-plus policy, for example, will include extra services not offered in a standard Basic policy. That’s why it’s so important to closely examine what each policy includes, rather than just going for the cheapest plan available.
Portability
Don’t re-serve waiting periods when you switch to a new health fund or policy
“John was immediately covered for a hip replacement in private hospital because he had already served his waiting periods for joint replacements on his old policy”
The cost of avoiding penalties: MLS and LHC loading
If you’re one of the many Australians earning over the MLS threshold, taking out private health insurance can indeed save you from paying this surcharge. But the penalties don’t stop there. Another big reason to think about getting private health insurance before you turn 31 years old is the Lifetime Health Cover loading.
LHC loading is an additional cost added to your health insurance premiums if you don’t have hospital cover by the time you turn 31. For every year after this age that you don’t have hospital cover, your premiums will increase by 2%, up to a maximum of 70%. So if you take out cover at 40, you’ll pay an extra 20% on your premiums for the next 10 years at least. The loading stops after 10 years of continuous cover, but the cumulative costs of leaving it so late can be huge.
While it’s true that avoiding these penalties is a common reason why some people go for a Basic hospital policy, as we’ve discussed, paying a bit more can provide real benefits without greatly increasing your monthly costs.
Is paying a bit more worth it?
For just a few dollars more each month, upgrading to a Basic-plus or Bronze hospital policy could give you much broader protection. Not only will you get to avoid the MLS and LHC loading costs, but you’ll also be taken care of in the event you need more expensive hospital treatments.
Given the broader scope of cover on slightly ‘higher up’ policies – with only a fairly minor bump in the cost of premiums – these plans might just deliver better value for you in the long run, especially if you end up needing regular or serious hospital treatments.
Conclusion
Ultimately, private health insurance is about more than just avoiding penalties. You also want it to give you peace of mind that you’re covered when you need it most. At Fair Health Care Alliance, we can help you find the right balance between affordability and the best amount of cover. Contact us today to learn more about your options and compare health insurance to find a plan that works for you.
