Private health insurance often rates among the most painful of household expenses – but do you understand what you're actually getting in return?

Professor Luke Connelly is Professor of Health Economics at UQ's Centre for the Business and Economics of Health. Contact asked him to explain what all Australians need to know about getting real value from private cover and avoiding the mistakes that catch so many people out.

Key points

• Private cover offers faster treatment and greater choice of specialist.
• If trying to cut costs, choosing a higher excess is often a safer choice than reducing coverage.
• Understanding the Medicare Levy Surcharge (MLS) and Lifetime Health Cover (LHC) loading is key to avoiding unnecessary financial pain (and Professor Connelly breaks down how they work).
• Getting value for money depends on how much you prioritise choice, convenience and shorter wait times.
• There are a few key questions you should ask yourself to help choose the right policy.

How do Australia's public and private health systems work together?

Everyone who is covered by Medicare is eligible for free health care services delivered in a public hospital, by a salaried or sessional doctor who is assigned to you. They are also eligible for Commonwealth subsidies (Medicare rebates) on private services provided by GPs and specialists. In some cases, where the doctor accepts the rebate as the full price, the patient pays nothing out of pocket (the doctor bills the Australian Government for the services, which we call direct billing or bulk billing). Practitioners can charge more than the rebate, though, and the more they charge the larger the out-of-pocket fees the patient must pay.

Private health insurance (PHI) covers care that is provided in a private hospital, or a private ward in a public hospital. The main advantages of PHI are that the waiting times for elective procedures – that is, procedures that may be necessary, but are not considered urgent (e.g., hip replacements, knee replacements and colonoscopies) – tend to be much lower in the private system than in the public system. You can also choose your own specialist when you go private, which is not the case if you’re treated as a public patient. Some health funds also have entered ‘known-gap’ fee arrangements with a subset of specialists, which may limit the out-of-pocket payments you’ll need to make for your treatment.

What are the most common exclusions or hidden costs?

The biggest complaints seem to arise for 2 reasons: one is that people assume that they will only have to pay their excess (what economists call the ‘deductible’) and everything else will be covered. That’s not usually the case. Often, specialist out-of-pocket costs will still be considerable.

The other is forgetting that, to lower their premiums, they opted for a bigger excess on their policy. Often that will be capped for a financial year at, say, $500–$1,000, so you pay that amount for your first hospital admission of the year and further admissions are exempt.

Finally, when you choose cheaper policies, the lower premiums sometimes represent the exclusion of some services. For instance, you might decide to take a policy that does not cover certain conditions, such as pregnancy, cataracts, knee replacement, psychiatric services and so on. If you use a private hospital to be treated for any of those things and they’re excluded from your policy, you’ll be left to pay the full bill, minus any Medicare rebates that are paid towards the health care services you use.

What's the best way to approach getting value for money?

The type and level of cover you buy is very much a personal decision that depends on your life circumstances. My suggestion is that people consider taking policies with broad inclusions: don’t exclude things that you could need, even if you think they’re unlikely. For example, if you’re young and healthy, it still might not be wise to exclude things like knee replacements or psychiatric services from your policy to save money.

A better way to bring the premium down might be to accept a bigger excess on it, without reducing coverage. For that, you can ask yourself whether paying the excess would be ruinous for you, or not. If you can easily come up with a large excess (e.g., $1,000 or more) and you are not a heavy user of hospital services, it could make sense to take a gold or platinum policy with few exclusions, but a bigger excess, rather than cutting back on hospital coverage.

You could also consider whether or not dropping your extras cover (for things like physio, dental, chiropractic, optical and other services) makes sense for you: do the premiums you will pay, on average, justify the money you will get back through claims? If not, you might be better off paying for those things yourself and buying stronger catastrophic cover for hospital services.

How do the Medicare Levy Surcharge and Lifetime Health Cover loading work?

The Lifetime Health Cover (LHC) scheme penalises people who don’t take out PHI at or before the age of 31, adding a percentage on your PHI policy costs for the first 10 years. The longer you leave it, the larger the penalty.

Interestingly, the work we’ve done in the past shows that PHI may not be particularly good value for people under 50, in the sense that premiums will exceed the benefits an average person receives until they’re in their 50s.

But this is where the Medicare Levy Surcharge (MLS) changes the calculations for many younger people. Essentially, the MLS is calculated at between 1% and 1.5% of your taxable income as soon as your income reaches a particular level (for 2026–27 these thresholds are $105,000 for singles and $210,000 for married couples). It essentially increases, in bands, as your personal or family income grows.

If you don’t, the extra tax you pay is likely to exceed the cost of the policy, so you’ll be financially worse off. According to our analysis, the MLS, not the LHC scheme, is the glue that holds the private health insurance system together in Australia.

During a cost-of-living crisis, is private cover really worth paying for?

You need to consider what will happen for you and any dependents you have if you have unanticipated and substantial health care needs. Generally speaking, you don’t need to worry about quality: there is plenty of evidence that, if you need to go public, the service safety and quality will be at least as good as you get – in terms of clinical outcomes – as what you will get in the private system.

Waiting times for non-urgent care will typically be longer, though, and you don’t get to choose your own doctor or have your own private room in a public hospital. It depends how important those considerations are to you. Second, if you’re younger, you should remember that delaying getting in to PHI will land you with that painful LHC loading as soon as you’re 32 or older.

Leaving those things aside, though, if you’re a middle- or higher-income earner, you’ll want to buy PHI if only to avoid the MLS penalty, provided you can find a policy with a premium that’s less than the tax penalty.

Many Australians under 30 feel they don't need private health insurance.

What are the pros and cons for younger people?

The main advantage is that if your income is higher, you’ll avoid a tax. For a small fraction of people who get a serious health problem young in life, the advantages then come from enhanced access – speed and choice – to health care services.

An inherent disadvantage is that insurers are required, by law, to offer the same policy at the same premium to people of all ages. So, a 20-year-old who buys the same policy as an 80-year-old will pay the same amount for it, even though they are likely to be very low claimers by comparison.

Essentially, young people, on average, end up paying premiums that are 2–4 times as much as the benefits they claim. Whereas, on average, the reverse is the case for older people – the benefits they receive may be 4–5 times the premiums they pay.

What's the one thing you wish every Australian understood before choosing a private health insurance policy?

That you can save some money by thinking carefully about the main reasons you’re buying the policy. Ask yourself:

• Is it mostly to avoid a tax surcharge?
• Is it because you are likely to need elective surgery?
• Is it because you want to be able to choose your own specialists?
• How much can you afford to pay out-of-pocket if you need to?

The answers to those questions may help you to choose the right policy for you, or determine whether you even need, or want, private cover.

Finally, consider the large number of insurers we have in Australia and see if you’re eligible for some that may be cheaper than the insurers you’re familiar with. For example, there are some restricted funds you may be eligible for that have relaxed the limitations on who can join them. These funds were historically restricted to workers in particular industries, but if you have a family member who's in the designated profession, you may now be eligible to join too.

Disclaimer: The information provided in this article is general in nature only and does not constitute personal financial or medical advice. Before acting on any information in this article, you should consider the appropriateness of the information for your own objectives, financial situation and medical needs.