Mon Sep 22

Should we scrap private health insurance rebates and direct the funding to public hospitals?

Written by: Terence C. Cheng, Associate Professor, Centre for Health Economics, Monash University

If you’re one of the 45% of Australians ^[1] with private health insurance, chances are the government pays, or has paid, a proportion of your premiums via rebates.

Taxpayer spending on these private health insurance rebates is projected ^[2] to reach A$7.6 billion in 2025.

The rebates are a key source of revenue for private hospitals. In 2022–23, private health funds contributed $9.7 billion. This is around 45%^[3] of the $21.5 billion spent on private hospital services.

But are rebates achieving their aim of reducing pressure on the public hospital system? And if not, should the government scrap them and direct this funding to ailing public hospitals?

Remind me, what are the rebates?

The private health insurance rebate was designed ^[4] to encourage Australians to purchase private health insurance. The goal was to reduce both cost and capacity pressures on the public health-care system.

The Howard government introduced the rebate in the late 1990s, alongside:

Medicare levy surcharges ^[5], a 1–1.5% levy on taxable income for those without private health insurance
Lifetime health cover ^[6] policies, a 2% loading on premiums (per year for ten years) if you take out private health insurance after you turn 31.

Initially, the private health insurance rebate covered 30% of premiums for all Australians, and subsidies were eventually made higher ^[7] for people over 65.

Since April 2014, the rebate has been indexed annually ^[8], and the government’s contribution has gradually declined as a share of total premiums.

The rebate is also means-tested, with higher-income Australians receiving a smaller subsidy.

Singles under 65 years of age earning less than $97,000 receive ^[9] a 24.3% rebate. The subsidy gradually phases out to zero for those earning above $151,000.

Why do we subsidise private health insurance?

A justification for the rebates is that higher uptake of private health insurance would reduce pressure on the public healthcare system.

There is good evidence that people with private health insurance are more likely to opt for private care when they need hospital treatment.

A 2018 study ^[10] showed having private health insurance increased the likelihood of a private hospital admission by 16 percentage points, and reduced the likelihood of a public admission by 13 percentage points.

However, getting more Australians to take out private health insurance doesn’t necessarily ease pressure on the public system ^[11] in a meaningful way.

A 2024 study of Victoria’s public hospital system found ^[13] higher rates of private health insurance coverage leads to only marginal reductions in public hospital wait times.

So rather than relying on private insurance, a more direct way ^[14] to reduce public hospital waiting times would be to increase funding for the public hospital system.

Do the benefits exceed the costs?

A recent study commissioned by Avant Mutual ^[15] showed the rebates are cost-effective, generating $1.25 in savings for every dollar spent on the rebates.

A 2023 review of the private health insurance incentives ^[16] commissioned by the Commonwealth Department of Health and Aged Care also found that having rebates results in net savings for the government. In other words, the government saves on health-care costs from people holding private health insurance and the savings outweigh what it spends on subsidies.

The review concluded the policy was “a very good financial deal for the government”.

Conversely, my past research indicated ^[17] savings from scrapping the rebate would outweigh the additional costs of treating more patients in the public system.

This is likely because there are still significant financial incentives for people to maintain their health cover, especially among people on high incomes who are liable for the Medicare Levy Surcharge.

Another study ^[18] from 2024 examined the relationship between having private insurance and the choice of private or public care. It concluded that even under optimistic assumptions about substitution, the potential savings in public hospital expenditure could not justify the cost of the rebates.

How can we make sense of these conflicting conclusions?

Part of the answer lies in the fact the studies rely on different assumptions, methodology and data. A key modelling consideration is how responsive consumers are to changes in the price ^[19] of insurance.

The academic literature generally finds ^[20] consumers aren’t very sensitive to changes in the price of insurance. As such, a reduction in the rebate would likely lead to only a small decline in private health insurance membership and a limited impact on public hospital use.

Private health insurance rebates are declining over time due to indexation and means-testing, and the government’s contribution to premiums has gradually declined over time.

The available evidence tells us private health insurance does little to relieve pressure on the public system, contrary to the rebate’s intended purpose.

Yet there is no consensus on whether reducing or removing rebates would produce net savings, or end up costing the government more than it saves. This is one area where more independent and rigorous research ^[21] is needed.

Don’t cut rebates – but don’t expand them either

In the current environment with cost-of-living pressures ^[22], increasing private health premiums are placing growing strain on household budgets. In this context, rebates provide some relief and there is a good argument for maintaining them at their current levels.

Some argue rebates ^[23] should be reinstated to their original 30%. However, since private health insurance does little to relieve pressures on the public system, the evidence doesn’t support expanding the rebates.

Any new funding would be better directed to expanding public system capacity or directly funding elective surgery in private hospitals to reduce public hospital waiting times.