Is private health insurance worth it at tax time? What Australians should weigh up

Tax time prompts a familiar question: is private health insurance worth it?

As Australians prepare to lodge tax returns and review household budgets, private health insurance often comes under scrutiny. For some people, the decision is primarily about access to private hospitals, shorter waiting times for elective surgery, or the ability to choose a doctor. For others, it is more of a calculation: whether paying for cover is cheaper than paying tax penalties that can apply when higher-income earners do not hold eligible hospital insurance.

This year’s reassessment comes as many policyholders face higher costs. About 15 million Australians saw private health insurance premiums rise in April after the federal government approved the biggest annual average premium increase in seven years. At the same time, concerns persist that some products offer limited real-world benefits, particularly for younger and healthier consumers.

There is no single answer that suits everyone. The value of private health insurance depends on your income, age, and health needs, as well as the fine print of the policy you are considering.

How private health insurance is meant to fit alongside Medicare

Australia’s private health system is designed to complement Medicare and reduce pressure on the public hospital system. The policy logic is that people who can afford private care are encouraged to use it, helping preserve capacity in the public system for those who rely on it.

Private treatment can offer advantages such as shorter waiting times for elective procedures and the ability to choose a doctor. Over time, governments have introduced incentives and penalties intended to encourage take-up of private cover, especially among higher-income earners and younger people, to help maintain the balance of the insurance “risk pool”.

However, the system is under strain as Australia’s population ages. A 2023 report prepared by EY for the federal government illustrated how claims rise sharply with age: for people aged over 75, average hospital claims were over $7,000 per person, compared with about $850 per person for those aged 40–45. Over the longer term, demographic change is expected to intensify these pressures, with projections that by 2064–65 nearly one-quarter of the population will be aged 65 and over.

Why many younger Australians question the value

Rising premiums are only part of the story. Critics argue that insurers, seeking to remain profitable, have responded by stripping back coverage, increasing excess payments, and raising prices. The result, for some consumers, is that they pay for insurance that may not deliver much when they actually need it.

Stephen Duckett, an honorary professor at the University of Melbourne and former secretary of the federal health department, has argued that for young, healthy Australians, private health insurance often provides little value. He has also pointed to the existence of policies that are priced to sit just below certain tax thresholds, which can encourage people to buy cover mainly to avoid a penalty rather than to obtain meaningful protection.

These products are sometimes described as “junk insurance” because they may offer minimal benefits while still meeting basic requirements that allow a person to avoid certain tax charges.

The Medicare Levy Surcharge: the tax penalty many people are trying to avoid

A central tax-time consideration is the Medicare Levy Surcharge (MLS). Introduced in 1997, the MLS is designed to encourage higher-income earners to take out private hospital cover. If you earn above certain thresholds and do not have eligible hospital insurance, you may be required to pay the surcharge.

The MLS ranges from 1% to 1.5% of income. It applies once an individual earns above $97,000, or once couples/families earn above $194,001.

Professor Duckett has described the MLS as an unusual feature for a private market, because it is intended to push people into buying a product they may not use, thereby improving the insurer risk pool.

For consumers, the key is that MLS liability is not always obvious until tax time. It is calculated when you lodge your return, rather than being automatically settled through employer withholding, which means it can reduce a refund or add to a tax bill.

• Income thresholds matter: MLS applies above $97,000 for individuals and $194,001 for couples/families.

• It is calculated annually: The surcharge is assessed when you process your tax return.

• Days of cover count: MLS is based on the number of days you held eligible cover during the financial year, so holding cover for only part of the year may still leave you paying some surcharge.

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

People can estimate their MLS using the Australian Taxation Office calculator. For anyone near the threshold, this can be a useful starting point when comparing the cost of premiums against the potential surcharge.

Lifetime Health Cover loading: a separate penalty that can surprise people later

In addition to the MLS, some Australians face another financial lever: Lifetime Health Cover (LHC) loading. Introduced by the Howard government, LHC loading penalises people who do not take out private hospital cover by age 31.

The loading adds an extra 2% to premiums for every year after age 31 that a person does not have hospital cover. The loading is capped at 70% and is removed after 10 years of continuous cover.

Choice insurance analyst Mark Blades has warned that LHC loading can catch people off guard in their 40s. As an example, he noted that a 41-year-old taking out private cover for the first time would face a 20% LHC loading on their premium.

However, Blades also argues that in many cases it can still work out better to pay the loading later when you actually need health insurance, rather than carrying a basic policy for years primarily to avoid the loading. His reasoning is that basic cover can be “overpriced for what you’re getting” if it provides very limited benefits.

When two penalties can hit at once

For some people, the decision becomes more complicated after age 31. Once someone is over 31 and earns above $97,000, two separate mechanisms may apply: the MLS if they do not have eligible hospital cover, and LHC loading if they take out cover for the first time later in life.

This combination can make the “do nothing” option more expensive for certain taxpayers, while the “buy the cheapest cover” option may reduce tax exposure but leave the person with a policy that is difficult to use in practice.

Blades has noted that people earning above the MLS threshold can choose a low-cost policy to save a few hundred dollars, but he cautions that it may be a product “you can’t really use”.

Exclusions and excess: why cheap policies may not protect you when you need care

One of the most important factors when judging value is what a policy actually covers. Critics argue that exclusions and excess payments have become much more common, reducing the practical benefit of holding insurance.

Greg Jericho, chief economist at The Australia Institute, has argued that the private healthcare system struggles because it is not attractive to those least likely to need it, even though those people are often the most profitable for insurers. In his view, private health insurance is generally not a good option for young Australians, except possibly for those in competitive sports who may be at higher risk of needing procedures such as knee or shoulder surgery.

Jericho also highlighted how policy design has shifted over time. He said that in 2000 around 3% to 4% of private health insurance policies had exclusions, whereas now it is around 65%. He also said the share of policies with excess payments has risen from around half to about 85%.

These changes matter because they affect what you receive for your premium. A policy can meet the requirements to avoid tax penalties while still leaving you exposed to significant out-of-pocket costs.

• Exclusions: Some policies exclude certain treatments or services, limiting when you can claim.

• Excess payments: Basic cover commonly includes an excess; Blades cited an excess usually about $750 for basic cover.

• Gap fees: Even with cover, you may face additional charges when using services.

• Bundling requirements: Some policies require you to take out extras in addition to hospital cover, which can increase total cost.

Blades has advised that anyone considering a cheap hospital policy to avoid tax penalties should think through what happens if they actually need to use it. Paying an excess and other fees can quickly change the value equation.

The private health insurance rebate: a subsidy that depends on income and age

The cost of private health insurance is partly offset for eligible consumers by the private health insurance rebate. The government contributes about $7.5 billion annually through this program.

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 in the context of rising medical costs and an ageing population. It is indexed, and it dropped last year by a few percentage points. It dropped again this year from 24.6% to 24.3%.

When comparing policies, it can be useful to check how the rebate applies to your circumstances, because it affects the net premium you pay.

Switching and shopping around: why it can be difficult, and why it still matters

Even when consumers decide their policy no longer suits them, changing cover is not always straightforward. Large insurers can make it difficult for people to drop a policy and take up a new one, particularly for top-tier cover. Practical barriers can include waiting periods and the possibility of losing unused benefits.

Still, reviewing your cover can be worthwhile. With premiums rising and exclusions more common, understanding exactly what you are paying for is essential—especially if you suspect you are holding insurance primarily for tax reasons.

There are market comparison tools, including government-provided options, that allow consumers to look up a Private Health Insurance Statement and compare policies across health insurers in Australia. These tools can help people check inclusions, exclusions, waiting periods and whether a policy requires extras alongside hospital cover.

A structured way to weigh up the decision

For anyone making a tax-time decision, it can help to separate the question into two parts: the financial incentives and the health-service value.

• Step 1: Estimate tax exposure. If your income is above the relevant threshold, calculate potential MLS liability using the ATO calculator and consider whether you would be affected by LHC loading now or in the future.

• Step 2: Price the policy you would actually buy. Compare the premium (after any rebate you are eligible for) with the surcharge you might otherwise pay.

• Step 3: Read the product details. Check exclusions, waiting periods, and excess payments. A low premium may come with limited coverage and higher out-of-pocket costs if you claim.

• Step 4: Consider your likely use. Your age, health status and personal circumstances can influence whether private cover is likely to deliver practical benefits beyond tax outcomes.

Duckett’s view is that young and healthy people often get little value from private health insurance, while Jericho argues many people take it out mainly to avoid penalties. Blades, meanwhile, cautions that basic policies may be poor value and suggests some people may be better off paying LHC loading later if and when they genuinely need cover.

Why the debate persists

The ongoing debate over private health insurance is shaped by multiple pressures: an ageing population, rising premiums, changes to policy design, and government settings that encourage take-up through a mix of rebates and penalties.

At the consumer level, the decision can feel less like a straightforward purchase and more like navigating a system of incentives. Some people will value the private system’s benefits and accept the cost. Others—particularly younger Australians—may look at exclusions, excess payments and premium increases and conclude the numbers do not stack up.

Tax time is often when these trade-offs become most visible, because MLS liability is assessed through the tax return process and because people are already reviewing finances, deductions and household spending.

Key takeaways before you decide

• Premiums rose in April for about 15 million Australians, following the biggest annual average increase in seven years.

• The Medicare Levy Surcharge applies to higher-income earners without eligible hospital cover, ranging from 1% to 1.5% of income, starting at $97,000 for individuals and $194,001 for couples/families.

• Lifetime Health Cover loading adds 2% per year after age 31 if you take out hospital cover later, capped at 70% and removed after 10 years of continuous cover.

• Exclusions and excess payments are more common than they were in the past, and can reduce the practical value of low-cost policies.

• The private health insurance rebate is means-tested (about 8% to 32%), not available above $151,001 for individuals or $302,001 for couples, and has been reduced over time.

• Comparing policies using available tools and checking your Private Health Insurance Statement can help clarify what you are actually covered for.

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