One thing we are often asked as accountants is “Should I get Private Health Insurance?”

The entire concept of Private Health Insurance (‘PHI’) can be a bit of a minefield, and quite confusing. There are of course several benefits that come from having the right PHI policy, including the ability to be treated in a private hospital, or as a private patient in a public hospital. This can often mean significantly reduced waiting periods for elective surgery, and a far more comfortable hospital stay. PHI policies will also offer the option of ‘Extras’ cover which typically covers part of the cost of services such as Obstetric, Physiotherapy, Chiropractic and other specialist areas,  and can be tailored to suit the stage that you and your family are at.

PHI isn’t cheap of course, and individuals and families really need to consider the pros and cons of having a good PHI policy, taking into account factors such as yours or your family’s overall health, ages, life stages and need for extras cover if you have active family members.

There’s also a potential tax impact of having adequate hospital cover, and it’s that aspect that we’ll take a look at in a bit more detail.

Firstly, we need to understand the Medicare Levy and the Medicare Levy Surcharge (MLS), and how they impact on us as individuals. 

The Medicare Levy is typically paid by all taxpayers in addition to the normal tax paid on income, and is only reduced or exempt to taxpayers in limited circumstances. Currently, the Medicare Levy is charged at a rate of 2% of a taxpayer’s taxable income, and is typically deducted by employers as part of the normal PAYG taxation system. 

The Medicare Levy Surcharge (MLS) is an additional charge, over and above the Medicare Levy, that is charged where you, and your partner and any dependent children (if applicable), do not have an appropriate level of private patient hospital cover, and your combined family income is above a certain level. 

The current MLS rates are as follows:

• 0% for incomes less than $90,000 for a single, $180,000 for a family
• 1% for incomes of $90,001 – $105,000 for a single, $180,001 – $210,000 for a family
• 1.25% for incomes of $105,001 – $140,000k for a single, $210,001 – $280,000 for a family
• 1.5% for incomes of $140,001 + for a single, $280,001 + for a family

Using a single person with a taxable income of $100k as a basic example, that individual would pay MLS of $1,000 (1% of $100k) if they did not have adequate private health cover. In that instance, it may well be beneficial for that individual to take out a PHI policy as a single, with the cost of the policy partly or possibly fully offset by their end of year tax bill being reduced by the $1k they’ll save from not being charged the MLS.

In our second example, consider a couple who each have taxable incomes of $110k. Combined family income is $220k, meaning the applicable MLS rate, if they don’t have adequate Private Health cover, is 1.25%. The total MLS they would pay is $1,375 each ($2,750 combined). Once again, they may find suitable cover that costs less than, or only marginally more than, the MLS, with the added benefit of private cover that will benefit them in the event of a hospital stay.

As well as the tax impacts, there’s a couple of other factors that can impact on the cost of PHI.

The ‘Private Health Insurance Rebate’ is an amount the government contributes towards the cost of your PHI premiums. The rebate is income tested, which means your eligibility depends on your income, and will typically reduce as your income increases. If you are eligible for the rebate, you can claim the rebate in one of two ways – through your PHI provider, in the form of reduced premiums, or when you lodge your tax return, as a refundable tax offset.

The other factor to consider is the concept of ‘Lifetime Health Cover’ and how that impacts on the cost of Private Health policies now and into the future. Lifetime Health Cover (LHC) is a government initiative that encourages you to purchase and maintain private patient hospital cover earlier in life. If you have not taken out and maintained private patient hospital cover from the year you turn 31, you will pay a 2% LHC loading on top of your premium for every year you are aged over 30, if you decide to take out hospital cover later in life. For example, if you take out private patient hospital cover when you are 40 years old, you could pay an extra 20% on the cost of this cover per year for 10 years. If you wait until you are 50 years old, you could pay 40% more per year for 10 years. The maximum LHC loading that can be applied is 70%. Once you have paid LHC loading for 10 years of continuous cover, you will no longer have to pay this loading.

If you cancel your private patient hospital cover after paying for the LHC loading for 10 continuous years, you may become liable to pay the LHC loading again if you take out another private patient hospital cover later.

Feeling confused? Like we said at the beginning, it’s all a bit of a minefield, and you should consult your accountant if you are wondering whether to take out a PHI policy, or you’re considering cancelling your existing cover. What seems like a guaranteed saving by not having cover may well end up costing you more, or close to an equivalent amount in the form of additional tax (Medicare Levy Surcharge), meaning the financial benefit of cancelling or not taking out a policy is negligible at best. Individual circumstances vary of course, and it’s not a ‘one size fits all’ approach. Seek advice on your own circumstances.