Private health insurance rebates: how the budget maths stacks up, and why targeting matters

Why governments subsidise private health insurance

For decades, the federal government has encouraged Australians to hold private health insurance as one way to ease pressure on the public health system. The logic is straightforward: if more people use privately funded hospital care (and related services), the government may spend less on public hospital activity and other publicly funded care.

That approach has come with an ongoing policy debate. Supporters argue subsidies help maintain participation and shift some demand away from public services. Critics question whether the large amount of taxpayer money used to subsidise premiums would be better directed to Medicare or to directly financing hospitals.

At the centre of the discussion is a practical budget question: when the government subsidises private health insurance, does it end up saving money overall, once both costs and savings are counted?

The “carrots and sticks” used to influence take-up

Australia’s policy mix uses both incentives and penalties to shape private health insurance participation.

• Premium rebates act as a subsidy, with higher assistance for low-income and older people. The rebate is a percentage of the premium.
• The Medicare Levy Surcharge operates as a penalty for higher-income earners who do not hold an eligible private hospital policy. The surcharge ranges from 1% to 1.5% of taxable income.

In budget terms, premium rebates are a direct cost to government. The Medicare Levy Surcharge is different: when someone buys an eligible policy, they avoid the surcharge, which means the government collects less tax revenue than it otherwise would. Any assessment of the policy’s net impact therefore needs to include both the subsidy paid out and the tax forgone.

What the analysis set out to measure

An analysis commissioned and funded by the Department of Health and Aged Care examined whether the savings associated with increased private health insurance participation outweigh the costs the government incurs through premium rebates and the forgone Medicare Levy Surcharge.

The core concept used to measure savings is known as the “offset”. In this context, the offset represents the public health-care costs the government avoids when a person with private health insurance uses private services rather than relying on the public system.

This offset is a key metric for judging whether the combined “carrots and sticks” are delivering value for money. If the offset is larger than the combined cost of rebates and forgone surcharge revenue, then the policy settings can be argued to reduce net government spending.

How offsets were estimated using 2019 spending

To estimate the offset, the analysis used private health insurance spending data from 2019 and then modelled what the government would likely have spent if those privately insured people did not have private cover and instead used the public health system.

Several assumptions and adjustments were included in the calculations:

• Hospital day costs: the analysis assumed that one day in a private hospital costs the same as one day in a public hospital, consistent with findings from the Productivity Commission.
• Medicare Benefits Schedule contribution: the government’s 75% contribution to the Medicare Benefits Schedule fee was factored in.
• Higher prostheses prices in private care: the analysis accounted for higher prices for prostheses in the private system, including for hip replacements and other implants.

With these elements included, the offset was calculated as the public spending that would have occurred without private insurance participation, net of the relevant public contributions that still occur when people use private care.

What the offset looks like across age groups

On average, the analysis found that private health insurance offsets public health-care costs by about $1,400 per person. However, the size of the offset varies substantially by age.

The offset was found to be greater for older people than for younger people, reaching about $4,000 for those aged 75 and above. This pattern is important because it suggests the fiscal impact of private health insurance participation is not uniform across the population. Older groups, who tend to use more health services, are associated with larger potential reductions in public spending when they are privately insured.

That does not, by itself, settle the policy debate. But it does indicate where the budget effects are likely to be strongest.

Counting the government’s costs: rebates and forgone surcharge revenue

To assess whether the offset outweighs the cost of encouraging private cover, the analysis also quantified what the government spends (or does not collect) because of the policy settings.

First, it applied standard premium rebate percentages to an average annual private health insurance premium of about $2,300. Examples of rebate settings used in the analysis included:

• A person aged 70 or above earning up to $90,000 attracting a 32.812% rebate.
• A person aged under 65 earning $105,001–$140,000 receiving an 8.202% rebate.

Based on those parameters and the $2,300 average premium, the implied government rebate cost ranged from about $755 at the higher rebate level to about $189 at the lower rebate level.

Second, the analysis estimated the value of forgone Medicare Levy Surcharge revenue when people enrol in private insurance and therefore avoid the surcharge. For single individuals subject to the penalty, the forgone tax amounts were estimated to range between $970 and $2,400.

These two components—rebates paid and surcharge revenue forgone—together represent the main fiscal “price tag” of the policy approach.

The bottom line: average net savings of about $554 per person

After combining the costs (premium rebate subsidies plus forgone Medicare Levy Surcharge revenue) and then subtracting the estimated offset (the public spending avoided), the analysis concluded the settings deliver a net budget benefit on average.

Specifically, it found that the subsidies are less than the cost offset by about $554 per person per year among those supported by these measures. In other words, on average, the government saves roughly $554 annually for each person it helps through the subsidy settings, once both the costs and avoided public spending are taken into account.

This result speaks directly to the recurring question about whether taxpayer support for private health insurance is “worth it” from a narrow fiscal perspective. Under the assumptions used and the 2019 spending data, the answer in this analysis is yes: the average offset exceeds the combined costs.

Why averages can hide important differences

Even if the average net impact is positive, the analysis raises a policy design issue: some groups appear to deliver much larger savings than others. If the government’s goal is to reduce net public spending while maintaining access and system performance, it matters which groups are most likely to generate offsets that exceed the cost of subsidies.

The findings indicate that older people, in particular, can produce large offsets. That creates a natural question for policymakers: should subsidies be adjusted to reflect where the largest offsets occur?

However, changing subsidies is not cost-free. Increasing subsidies for a group increases taxpayer spending unless the change leads to additional people enrolling in private health insurance (and thus generating additional offsets). The budget outcome depends on both the size of the subsidy and the behavioural response—how many extra people choose to take up private cover because of the change.

An example of how targeting could change the budget equation

To illustrate how targeting might work, the analysis provided an example for an individual aged 75+ earning $105,001 to $140,000.

• The person receives $1,877 in subsidies.
• Their private insurance participation offsets about $5,268 in public health spending.
• The implied net saving is $3,391.

The analysis noted there are roughly 6,000 people currently in this age and income group with private health insurance. Under the example provided, only two additional enrolments in this group would make an increase in subsidies budget-neutral.

This example is not presented as a universal rule, but as a way to show how the relationship between subsidy levels, offsets, and take-up can differ sharply across groups. It also demonstrates why policymakers might look beyond the average net saving and consider more tailored approaches.

The case for “risk-adjusted” subsidies

One proposed improvement raised by the analysis is to better target subsidies toward people who are more likely to need and use health services. In practice, that would mean moving toward risk-adjusted subsidies.

Risk-adjusted subsidies would provide additional support based on characteristics that are associated with higher expected health-care use and cost. The analysis described these characteristics as including:

• Age
• Gender
• Income
• Where a person lives
• Health history, such as prior hospitalisations or use of services

The rationale is that people who are sicker and need more medical care are also the people who could generate larger offsets for government if they hold private insurance and use private services. A subsidy that better reflects expected need could therefore align public spending on rebates with the areas where the potential public cost avoidance is greatest.

In the framework described, the subsidy could be computed using a formula based on individual-level spending to estimate how much health care a person is likely to need and what it is expected to cost.

Feasibility and the policy context

The analysis pointed to existing work in Australia showing how a risk-adjusted approach can be developed, and noted that systems in the Netherlands, Germany, the United States and Switzerland demonstrate such an approach is feasible.

This discussion comes at a time when private health insurance regulation is under review, with the Department of Health and Aged Care seeking input on options. The analysis positions its findings as a contribution to that policy conversation, particularly on how subsidy design could be refined.

What the findings do—and do not—settle

The analysis provides a clear answer to a specific fiscal question under a defined set of assumptions and data: using 2019 spending patterns and the modelling choices described, private health insurance participation produces an average offset that exceeds the combined cost of rebates and forgone Medicare Levy Surcharge revenue, yielding an estimated net saving of about $554 per subsidised person each year.

At the same time, it highlights that the net impact is not evenly distributed. Larger offsets among older people suggest that smarter targeting could potentially improve value for money, especially if subsidies are directed toward those more likely to use health services.

Ultimately, the policy challenge is to balance budget outcomes with the practical goals of the health system. The analysis suggests that, while the existing approach appears to deliver net savings on average, there is room to consider whether the structure of subsidies could be redesigned to better reflect differences in expected health-care use and the resulting offsets.