Is private health insurance worth it at tax time? Key trade-offs for Australians

Why tax time triggers a rethink

As Australians prepare to lodge their tax returns and review their finances, private health insurance often becomes part of the annual calculation. For some households, the question is straightforward: does the policy help them access private care in a way they value? For others, it is largely a numbers exercise driven by tax settings that penalise higher-income earners who do not hold private hospital cover.

This reassessment has become more common as premiums rise. Around 15 million Australians saw their private health insurance premiums increase in April after the federal government approved the biggest annual average premium hike in seven years. At the same time, many people report that policies have become harder to understand and less generous, with more exclusions and higher excess payments.

Whether private health insurance is “worth it” depends on your income, age and health needs. It also depends on the specific policy you hold—what it covers, what it excludes, and what you would still pay if you needed treatment.

What private health insurance is meant to do in Australia

Australia’s private health system is designed to complement Medicare, in part by taking pressure off the public system. People who can afford private care are incentivised to use it, including through the prospect of shorter waiting times for elective surgery and the ability to choose a doctor.

Over time, governments have introduced policies intended to push more people into the private system. These settings are not only about health access; they are also about maintaining a broader insurance “risk pool” by encouraging participation from people who may not claim much.

Why the system is under strain

The private health system faces structural pressure as Australia’s population ages. A 2023 report prepared by EY for the federal government highlighted how sharply claims rise in older age groups. It found that for people aged over 75, average hospital claims were more than $7,000 per person, while for 40–45-year-olds the average hospital claim was about $850 per person.

Longer-term demographic projections add to the challenge. By 2064–65, nearly one-quarter of the population is projected to be aged 65 and over. As more people move into older age brackets, demand for care increases, and costs rise across both public and private systems.

Stephen Duckett, an honorary professor at the University of Melbourne and former secretary of the federal health department, has described the private system as having “a lot of benefits and a lot of strengths.” But he and other observers also point to growing frustration among consumers as insurers seek to remain profitable by stripping back coverage, increasing excess payments and lifting prices.

The central tax issue: the Medicare Levy Surcharge

One of the most significant tax considerations is the Medicare Levy Surcharge (MLS). Introduced in 1997, the MLS is designed to encourage higher-income earners to take out private hospital cover. The surcharge ranges from 1% to 1.5% of income and applies once an individual earns above $97,000, or a couple/family earns above $194,001.

The MLS can turn private health insurance into a tax planning question, particularly for people who do not expect to use private hospital services. Professor Duckett has criticised the logic of this approach, calling it “a strange concept [for] a private market.” He argues the purpose is to push people into private insurance even if they are unlikely to claim, improving the risk pool.

There are several practical details that matter at tax time:

• How it is calculated: The surcharge is calculated when you lodge your tax return, rather than being fully accounted for through employer withholding. That means it can reduce an expected refund or increase a tax bill.

• Days of cover matter: The MLS is based on the number of days you hold cover during the financial year. If you were uninsured for part of the year, you may still owe a surcharge for that period.

• Family circumstances matter: Whether your spouse and any dependent children have private hospital cover can affect your MLS liability.

People can estimate their MLS using the Australian Taxation Office calculator, which can help compare the likely surcharge against the cost of premiums.

When “junk” policies enter the conversation

As premiums rise, some people consider buying the cheapest possible hospital policy primarily to avoid the MLS. Critics argue that this has encouraged the growth of low-value products. Professor Duckett has described some policies as offering minimal benefits while being priced just below the MLS threshold—cover that may do little beyond helping someone avoid a tax penalty.

Greg Jericho, chief economist at The Australia Institute, argues the private system is struggling “because it is not attractive to those who are least likely to need it, and [those people] are also the most likely to be profitable.” In his view, private health insurance is often not a good option for young Australians, except potentially for people at higher risk of injury—for example, those in competitive sports who may be more likely to need knee or shoulder surgery.

Jericho also points to a broader shift in policy design over time. He says that in 2000, around 3% to 4% of private health insurance policies had exclusions, compared with around 65% now. He also says the share of policies with excess payments has risen from around half to around 85%. The practical impact is that more people may be paying premiums for policies that cover less, while also facing co-payments if they do claim.

The age-based rule that surprises many: Lifetime Health Cover loading

Another key factor is Lifetime Health Cover (LHC) loading, introduced during the Howard government era. LHC loading penalises people who do not take out private hospital cover by age 31. The penalty is an extra 2% on premiums for every year someone does not have cover after age 31. It is capped at 70% and removed after 10 years of continuous cover.

Mark Blades, an insurance analyst from Choice, warns that LHC loading can catch people off guard, particularly when they first consider private cover in their 40s. As an example, a 41-year-old who takes out private cover for the first time would face a 20% LHC loading on their premium.

However, Blades argues that in many cases it can still be better to pay the loading later—when you actually need insurance—rather than maintain a basic policy for years just to avoid the penalty. His reasoning is that basic cover can be “overpriced for what you’re getting” because it provides “very, very little.”

The “double whammy” for some taxpayers

For people over 31 who also earn above the MLS threshold, the incentives and penalties can stack up. Blades describes a “double whammy” scenario: you may face the MLS if you do not have hospital cover, and you may also face LHC loading if you take out cover later for the first time.

That combination can make the decision feel urgent. But it can also lead people into choosing the cheapest possible product. Blades notes that higher-income earners can sometimes take out a low-cost policy to save a couple of hundred dollars, but warns it may be “a product you can’t really use.”

The private health insurance rebate: helpful, but shrinking for some

The federal government subsidises private health insurance through a rebate program, contributing about $7.5 billion annually. The rebate is means-tested and ranges from about 8% to 32%, depending on income and age. Individuals earning more than $151,001 and couples earning more than $302,001 are not eligible.

Even for those who qualify, the rebate has been progressively reduced in recent years amid rising medical costs and an ageing population. It is indexed, and it fell by a few percentage points last year. It dropped again this year, from 24.6% to 24.3%.

At tax time, the rebate can be part of the value equation, but it does not remove the need to scrutinise what the policy actually covers—particularly as exclusions and out-of-pocket costs become more common.

What you might still pay if you claim

Premiums are only one part of the cost. If you buy a cheap hospital policy mainly to avoid tax penalties, you also need to consider what happens if you do need to use it.

Blades cautions that basic hospital cover can come with significant out-of-pocket expenses. If you make a claim, you may pay:

• An excess: often about $750 for basic cover, according to Blades.

• Gap fees: additional costs that can arise depending on the treatment and provider.

These costs can matter as much as the premium when assessing whether a policy provides meaningful protection or simply meets a tax requirement.

Shopping around, waiting periods, and the fine print

Even if you decide private health insurance is appropriate for your situation, the next question is whether your current policy is the right one. Consumers are often advised to check their coverage and compare options across insurers, especially as the end of the financial year approaches.

There are market comparison tools available, including government-run services, that allow people to look up the details of what a policy covers and compare products across the industry. One of the key documents is the Private Health Insurance Statement, which sets out information about your cover.

When comparing policies, the fine print can be decisive. Factors worth weighing up include:

• Waiting periods: changing policies can reset or trigger waiting periods for certain services.

• Exclusions: some policies exclude categories of treatment, limiting usefulness when you need care.

• Excess and co-payments: higher excess levels can reduce premiums but increase costs when you claim.

• Bundling requirements: some policies may require you to take out extras cover as well as hospital cover.

Blades also notes that large insurers can make it difficult for people to drop a policy and pick up a new one, particularly for top-tier cover, due to issues such as waiting periods and the risk of losing unused benefits.

How to frame the decision: a practical checklist

Because the value of private health insurance varies widely, it helps to structure the decision around a few core questions and calculations:

• Are you above the MLS threshold? If yes, estimate the MLS you would pay and compare it to the net cost of suitable hospital cover.

• How old are you, and would LHC loading apply? If you are considering cover for the first time after age 31, factor in the potential loading and how long it would apply.

• What is your health and injury risk? Some people may value faster access or choice of doctor; others may be unlikely to use private services.

• What does the policy actually cover? Check exclusions, restrictions, and whether you would be protected for the services you might realistically need.

• What are the out-of-pocket costs? Consider excess levels (often around $750 for basic cover) and potential gap fees.

• Are you eligible for the rebate? Confirm whether you qualify and how much it reduces your premium cost.

For many people, the hardest part is separating the tax-driven incentives from the real-world value of the product. As Jericho has argued, some consumers take out cover mainly to avoid penalties rather than because they see clear benefits.

A note on consumer confidence

Trust and transparency can influence whether people feel private health insurance is worthwhile. In one recent example, one of Australia’s largest private health insurers agreed to pay back tens of millions of dollars to thousands of members after hospital claims were incorrectly rejected. Incidents like this can add to the sense that policy details and claims processes matter—and that consumers should actively check what they are paying for.

Bottom line: value depends on your circumstances—and your policy

Private health insurance in Australia sits at the intersection of healthcare access and tax policy. For some, it can provide meaningful benefits, including shorter waits for elective surgery and greater choice. For others—particularly young, healthy people—the value may be limited, especially if the policy has extensive exclusions or high out-of-pocket costs.

At tax time, the decision often comes down to comparing the cost of premiums (after any rebate) with the likely MLS, while also considering LHC loading rules and the practical usability of the cover. Whatever you decide, reviewing your policy’s exclusions, waiting periods, and excess levels—and comparing it against alternatives—can help ensure you are not paying for cover that does little more than satisfy a tax requirement.

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