Why do some wealthy people leave money on the table by not buying private hospital insurance?

Jul 18, 2021

One in three high-income earners choose not to take out private hospital insurance, even though they could save money by avoiding the Medicare Levy Surcharge. A reason behind this decision is that these individuals are happy to use public hospitals. This suggests that people may be unaware that they are being financially penalised on their taxes, or that the incentives for purchasing private insurance are not working.

What is the purpose of the Medicare Levy Surcharge and how effective is it?

The Medicare levy surcharge (MLS) was introduced on 1 July 1997 to charge extra taxes to Australian taxpayers who earn above a certain income ($90,000 for individuals and $180,000 for families) and do not have private health insurance for their hospital cover (Australian Taxation Office, 2021). The purpose of the MLS is to encourage middleand high-income earners to buy private hospital insurance (PHI) in the hope that this will lead to greater use of private hospitals and reduce demand on the public system.

Initially, the MLS, together with two other policies (rebates to partially fund PHI and Lifetime Health Cover to encourage people to buy PHI earlier) implemented between 1999 and 2000, were effective in increasing the take-up rates of PHI. But recently, these policies have become controversial (Zhang, 2020) because they are implemented with high costs to taxpayers and it is unclear how effective they have become. In the past decade, PHI premiums have risen much faster than wage growth (Duckett, 2019). More people find buying PHI is not worth it and have dropped their insurances.

The MLS was designed to penalise high-income earners who do not take out private hospital cover. As of now, individuals earning between $90,001- $105,000 pay 1 per cent of taxable income as additional levy surcharge, on top of 2 per cent of income as Medicare tax that everyone must pay (Zhang, 2020). The MLS rates increase to 1.25 per cent of taxable income for those earning $105,001- $140,000 and 1.5 per cent for those earning $140,001 or more (Australian Taxation Office, 2021). For example, someone who makes $120,000 a year would pay $1,500 (=1.25%*$120,000) additional tax if they do not purchase private hospital cover. To avoid MLS, they could find a basic plan that costs as low as $97 per month (or $1,164 per year) (one can use this website to compare plans: https://www. privatehealth.gov.au/dynamic/Search/). This way, they could save money even if they do not plan to use private hospital treatment and continue to rely on the public system.

In this Research Insight, we study how income is associated with the take-up rate of PHI. We examine the proportion of high-income individuals who could have saved money (avoided MLS) by purchasing PHI. Among those who do not purchase PHI even though they could save money, we investigate reasons that influenced their decision. We use data collected during 4-25 April 2021 from the Taking the Pulse of the Nation (TTPN) survey, conducted by the Melbourne Institute (see more details in the Data section below)

Key insights

1. High income is associated with higher take-up rates of private hospital insurance.

Households who earn more are more likely to buy private hospital cover (Figure 1). In our sample, rates of PHI increase with income: 40 per cent of Australian households earning less than $50,000, 56 per cent of those earning between $50,001-$140,000, and 79 per cent of those earning above $141,000 have private hospital insurance.

2. Singles earning more than $105,001 could save money by buying private hospital cover to avoid paying the Medicare Levy Surcharge.

We searched the privatehealth.gov.au website to find the cheapest private hospital cover for singles in Victoria (https://www.privatehealth.gov.au/dynamic/ Search/). For someone with an annual income of $105,001 and above, the savings from the avoided MLS (a minimum of $1313 =$105,001*1.25% per year) are greater than the cheapest basic-level hospital cover ($1164 per year).

Figure 2 compares the MLS costs (line) and the cheapest basic-level private hospital cover (bars) for singles, by income category, as of 9 June, 2021. Because the MLS is applied at a fixed proportion of income, the savings from purchasing PHI increase with income.

In this and the following analyses, we only focus on singles, because we do not observe family information and detailed income levels for household income above $200,000. The TTPN survey asked respondents their combined household income, so we identify singles and singles’ incomes for those who do not live with a partner.

3. One in three high income singles who could have saved money by purchasing private hospital insurance did not do so.

Among singles earning above $120,000, 35 per cent did not buy PHI even though they could have saved money (Figure 3). We focus on earnings above $120,000 to be conservative, as our survey only collected income at $20,000 increments for those who earn above $100,000. About 10 per cent of singles in our sample reported their annual income above $120,000.

4. Some high-income singles are happy with using public hospitals and are willing to pay more tax to support the public system instead of buying private hospital cover.

About 57 per cent of singles with earnings above $120,000 cited the reason why they do not hold private hospital insurance is that they are happy to use public hospitals (Figure 3).Seventy-six per cent cited expensive premiums are the reason not to buy, but they did not realise that they could save money by purchasing PHI. This suggests that some people may not completely understand the MLS policy. It is also possible some high-income earners are willing to pay more taxes to support public hospitals directly instead of buying private hospital cover.

Reconsider the goals of government regulations in private health insurance markets

The Australian government implemented the MLS to encourage people earning above $90,000 to purchase private hospital insurance (Australian Taxation Office, 2021). We find that one in three high-income singles (with an annual income over $120,000) in our sample did not buy PHI and therefore ended up paying additional tax. There may be several explanations for this. It is possible that some of them do not know about the MLS policy, but this is less likely for wealthy people who have accountants to help them with filing taxes. It is also possible that some made an error in their decisions. In addition, some people may intentionally choose to pay additional taxes to support the public system directly instead of being induced by the government to buy PHI when they do not need it.

Compared to a few years ago, more Australians are happy with using public hospitals and think Medicare cover is sufficient (Zhang and Prakash, 2021). This suggests that some people may think it is more appealing to fund public hospitals directly to reduce waiting time, instead of subsidising the private system with the hope of reducing the burden on the public system. If this is what people prefer, it forces the government to think more clearly about the goals of regulating the private health insurance industry.

Historically, government policies (e.g., MLS, rebates, Lifetime Health Cover) have aimed to increase the up-take rates of PHI. Initiated between 1997-2000, these policies were effective when they launched. However, community preferences, economic circumstances, and private insurance market structures have changed substantially. Between 2011 and 2019, private insurance premiums have risen three times more than the rate of wage growth—30 per cent increase in premiums compared to an eight per cent increase in wage, after adjusting for inflation (Duckett, 2019).

High premiums and unexpected expensive out-of-pocket costs have reduced the value of private health insurance for many Australians, especially for the young and the healthy. The government continues to subsidise the private health insurance industry with taxpayer’s money through rebates or tax penalties with the hope that this may reduce the burden on the public system and reduce waiting times. But there is not much evidence to support this. If people buy PHI only to avoid paying the MLS and still use the public system, money contributed to the private industry will not take the pressure off the public system. Findings from this study bring into question whether the MLS is still fit-for-purpose and if a new approach directly alleviating pressure off the public system is needed.

This Research Insight report is republished from the Melbourne Institute, authored by Professor Yuting Zhang & Dr. Kushneel Prakash of the Melbourne Institute: Applied Economic & Social Research. Click here to read the original report.

Research Insights produced by the Melbourne Institute provide a clear and practical understanding of contemporary economic and social issues in Australia. Supported by high-quality academic analysis, each Research Insight aims to make sense of complex issues to enable evidence-based decision making for policy and practice.

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