Private health insurance rebates: what the numbers suggest about savings, costs and better targeting

Why governments subsidise private cover

Australia’s federal government has long encouraged people to take out private health insurance as part of a broader effort to reduce the financial burden on the public health system. The policy approach is often described as a mix of incentives and penalties: subsidies that lower the price of premiums for some households, and a tax surcharge for higher-income earners who do not hold an eligible policy.

This approach remains politically and economically contested. A central question is whether the public money used to subsidise private premiums would deliver greater value if it were instead directed to Medicare or to direct hospital funding. In the year examined in the analysis discussed here, the total taxpayer contribution to private health insurance rebates was reported as A$6.7 billion, a figure that frequently sits at the centre of the debate.

To help answer the question, researchers commissioned and funded by the Department of Health and Aged Care analysed whether the savings associated with higher participation in private health insurance outweigh the costs to government of subsidising it. Their conclusion was that, on average, the government saves about $554 per person per year for each individual supported through these subsidies. The results also point to important differences by age and other characteristics, suggesting the design of rebates could be improved.

The “carrots and sticks” in practice

The “carrot” is the premium rebate: a subsidy that reduces the cost of private health insurance. The “stick” is the Medicare Levy Surcharge, which applies to higher-income earners who do not have the right level of private hospital cover. The surcharge ranges from 1% to 1.5% of taxable income for those who fall within the relevant thresholds and do not hold an eligible policy.

In the analysis, examples of standard rebate percentages illustrate how the subsidy varies across groups. A person aged 70 or above earning up to $90,000 attracts a 32.812% rebate. A person aged under 65 with income in the $105,001–$140,000 range would receive an 8.202% rebate. With an average annual premium of $2,300, those percentages translate into government costs ranging from about $755 down to $189, depending on the person’s circumstances.

But subsidies are not the only fiscal cost. When someone takes out private cover, they may avoid paying the Medicare Levy Surcharge. That means the government forgoes revenue that would otherwise help fund the public system. In the modelling, forgone surcharge amounts for single individuals subject to the penalty were estimated to range between $970 and $2,400.

How the savings were estimated: the idea of “offsets”

To assess whether subsidising private cover “pays off” for government, the analysis compared two sides of the ledger:

• Costs: the premium rebate paid by government, plus the value of forgone Medicare Levy Surcharge revenue when a person holds private cover.

• Savings: the public spending avoided when someone with private insurance uses private services rather than relying on the public system. The analysis refers to this as the “offset”.

The offset is a key concept because it attempts to quantify how much public health-care spending is displaced when a person is privately insured. Put simply, if a privately insured person uses a private hospital rather than a public hospital, the government may avoid some costs it would otherwise have borne. The analysis sought to estimate those avoided costs and compare them with the public costs of encouraging private participation.

The data and assumptions used in the modelling

The modelling drew on private health insurance spending data from 2019. To convert that spending into an estimate of public costs avoided, the analysis made several assumptions and adjustments.

One assumption was that one day in a private hospital costs the same as one day in a public hospital. This was based on findings from the Productivity Commission, and it matters because hospital activity is a major component of health expenditure. If the cost per day differs substantially between sectors, that would change the estimated size of the offset.

The analysis also accounted for the government’s 75% contribution to fees under the Medicare Benefits Schedule. In addition, it factored in higher prices for prostheses in the private system, including items such as hip replacements and other implants. These adjustments are important because they acknowledge that private care can involve different pricing structures and different mixes of funding compared with public provision.

What the results show: average savings, and much larger savings for older people

On average, the analysis found private health insurance offsets public health-care costs by about $1,400 per person. That is, the estimated avoided public spending associated with a privately insured person was around $1,400 per year on average.

However, the average masks large variation across age groups. The analysis found greater savings for older people than for younger people, with offsets reaching about $4,000 for those aged 75 and above. This pattern is consistent with the idea that older people, on average, are more likely to use health services, including hospital care, and therefore have a greater capacity to shift costs away from the public system when they are privately insured.

In fiscal terms, this age gradient matters because it suggests that the “value for money” of subsidies depends on who receives them. If the government is paying a subsidy to encourage private cover, the net budget impact will be shaped by whether the person is likely to generate a large offset.

From offsets to net budget impact: why the government still comes out ahead

To determine whether the policy settings are a good financial deal for government, the analysis combined the costs and savings. Specifically, it added together:

• the cost of the premium rebate, and

• the forgone Medicare Levy Surcharge revenue,

and then subtracted the estimated offset (the avoided public spending). Using this approach, the analysis concluded that, on average, the subsidies are less than the cost offset by about $554 per privately insured person per year. In other words, after accounting for both the rebates and the forgone surcharge revenue, the government still saves money on average because the avoided public spending is larger.

This finding does not mean every subsidised person generates net savings. Rather, it indicates that across the population examined, the net effect is positive for the budget. That distinction is central to the next policy question: whether the rebates could be redesigned so that public spending is more tightly aligned with where the largest offsets occur.

Why targeting matters: not all groups deliver the same net savings

The analysis explicitly raises the issue of whether subsidies could be changed based on who costs more to provide health care for, and who saves the government more money by being privately insured. The logic is straightforward: if some groups generate offsets that are much larger than their associated subsidy costs, then shifting more support toward those groups could increase net savings—provided it also changes behaviour (that is, leads to additional enrolments in private cover).

One example in the analysis illustrates the scale of potential differences. For an individual aged 75+ earning $105,001 to $140,000, the modelling indicates they receive $1,877 in subsidies and offset $5,268 in public health spending, producing a net saving to government of $3,391. The analysis notes there are roughly 6,000 people in this group currently in private health insurance, and suggests only two additional enrolments would make the policy budget-neutral for that group.

Examples like this show why a “one size fits all” rebate design can be blunt. If the goal is to manage public spending pressures, then the most fiscally efficient subsidies would be those that encourage private cover among people who are likely to use more services and therefore generate larger offsets.

The case for risk-adjusted subsidies

Rather than relying primarily on broad rebates linked to age and income, the analysis points to a different approach: providing extra subsidies to people who are sicker and need more medical care. These are described as risk-adjusted subsidies.

A risk-adjusted subsidy would be based on a person’s characteristics such as:

• age

• gender

• income

• where they live

• health history, including prior hospitalisations or use of services

The rationale is that these are the people who need private health insurance the most, and who would also save the government the most money by holding private cover, given their higher expected use of health services. Under this approach, subsidies would be computed using a formula that draws on individual-level spending to estimate how much care a person is likely to need and what it is expected to cost.

The analysis notes that existing work in Australia has shown how such a system can be developed, and that other countries—including the Netherlands, Germany, the United States and Switzerland—demonstrate that risk-adjusted approaches are feasible.

What this means for ongoing reform discussions

The Australian health system, and private health insurance regulation in particular, is described in the analysis as being set for a “shake-up”, with the Department of Health and Aged Care seeking input on policy options. In that context, the findings offer two practical contributions to the debate.

First, they provide an estimate—based on 2019 spending data and stated assumptions—that the current mix of rebates and surcharge settings delivers net savings to government on average. This is a direct response to the recurring claim that the rebate is simply a fiscal drain that could be better deployed elsewhere.

Second, they highlight that the net savings are not evenly distributed. Older groups, particularly those aged 75 and above, appear to generate much larger offsets. That creates a policy opportunity: if the objective is to maximise public value for each dollar spent on subsidies, then better targeting becomes an obvious area to explore.

Key takeaways

• The analysis examined both the costs to government (premium rebates and forgone Medicare Levy Surcharge revenue) and the savings (public spending offsets) associated with private health insurance participation.

• Using 2019 private health insurance spending data and specified assumptions, it estimated an average offset of about $1,400 per person, rising to around $4,000 for people aged 75+.

• After combining costs and savings, it concluded the government saves about $554 per person per year on average for those supported through the subsidies.

• The results suggest rebates could be better targeted, including through risk-adjusted subsidies that reflect expected health-care needs and likely public cost offsets.

As policymakers consider changes to private health insurance settings, the central message from the modelling is not simply that subsidies can produce net savings, but that the design of those subsidies matters. The biggest fiscal gains appear to come when private cover is held by people who are more likely to use health services—raising the prospect that a more tailored approach could improve efficiency while still supporting broader health system goals.