If you earn more than $93,000 a year (or you and your partner bring in over $186,000) and you don’t have private health cover, you will likely be charged an additional 1-1.5% of your taxable income to cover the surcharge.

The threshold has just gone up slightly, from $90,000 in July 2022, but there continues to be a huge chunk of Australians eligible to pay. This is on top of the Medicare levy itself, which applies to some extent to most Australians who earn over $24,276.

If you’re young, fit and healthy, and wondering whether you need private health care at all, the surcharge is likely a bit of a slap in the face. It’s often cheaper to get private cover than pay the surcharge, even if you don’t think you’re going to get your money’s worth.

InfoChoice spoke to Luke Connelly, Professor of Health Economics at the Centre for the Business and Economics of Health at the University of Queensland, to discuss how he feels Australians, particularly those under 40, should approach this decision.

Is private healthcare in Australia worth it?

In Australia, unlike other insurance types, health insurance premiums aren’t charged on risk. It’s different to something like car insurance, where if you’re a 20 year old male with a Subaru WRX and have a terrible crash history, you’re going to pay a lot more than a 45 year old woman with a Corolla. In Australia under the private health insurance umbrella, no matter if you’re a metaphorical WRX or Corolla, you pay the same.

The non-risk based health insurance premiums are also different to other countries' approaches. In the United States for example, an insurer will make an assessment about how likely it is someone will need hospital services, and charge them accordingly. An overweight, diabetic 70 year old smoker will typically pay much higher health insurance premiums in America than a fit and healthy twenty year old, for example.

While lots of people feel our healthcare system is far more equitable, it does mean, as Professor Connelly points out, younger Australians get a bit of a raw deal.

“People who are 50 years old or over tend to do quite well out of private health insurance on average, when you compare the dollar amount they pay in premiums compared to what they get back out in services,” Professor Connelly told InfoChoice.

“Older people end up paying much less in terms of what they receive. They might receive a dollar's worth of services for every dollar they pay in premiums. For young people, they can be paying as much as two dollars for every dollar worth of services.”

How young people can get more value out of private health insurance

Mr Connelly says Australians should take into account the likelihood of them needing hospital care before buying private cover.

“People who are relatively young and healthy and don’t anticipate having to use hospital services, but also have low income can probably get away with not having private health insurance,” he said.

However, the surcharge means many people will still be better off buying comprehensive policies, even if the numbers don’t add up.

“If you buy the cheapest hospital policy, you’ll often find the premium expenditure you make will be less than the surcharge,” Professor Connelly said.

His advice is for the young and healthy to look for policies where the annual premiums work out to be less than the Medicare levy surcharge. If you can’t find a cheaper policy, it might be worth rolling the dice, just paying the surcharge and going without hospital cover.

Critics of the surcharge refer to the ‘private health death spiral', where young people buy basic policies they don’t need to avoid the surcharge, effectively giving free money to insurance companies for products they are unlikely to use.

One strategy some young Australians use is known as ‘hit and run’ in the insurance industry. This refers to Aussies taking out policies for a brief period where they expect to use healthcare services more often, then dropping coverage when that period is over.

“For example, young couples who are about to have children think ‘okay, we’ll get private health insurance now because we’re expecting to have children in the next couple of years,'“ Professor Connelly said.

“They then use all the private services in the hospital when they give birth and so on. Once the children are healthy, they then drop the insurance.”

The same principle could apply for those who are considering an elective procedure like a knee replacement in the next couple of years.

In Australian private health insurance, young people effectively subsidise older peoples' premiums - dropping in and out of the system makes it more expensive for everyone down the track, hence why it’s called the death spiral.

What about Lifetime Healthcare Cover?

Professor Connelly also says younger Australians considering private healthcare also need to take lifetime healthcare cover (LHC) loading into account. This is a government initiative designed to encourage Australians to buy private health care earlier in life.

For Aussies who have not taken out and maintained private hospital cover when they turn 31, when they eventually do decide to take out a policy, they are charged a 2% LHC loading fee for every year they were aged over 30 and were not covered, on top of their premiums. The maximum LHC that can apply is 70%, and you can only eliminate it after paying for 10 years of continuous cover.

For example, if you take out your first policy aged 35, you might need to pay an extra 10% on your premiums for 10 years. If you wait until you are 40, you’re likely to be charged another 20%, and so on.

This is another means of pressuring young people into private health cover. You aren’t young forever after all, so saving money on premiums in the short term could mean health insurance becomes much more expensive down the track, when you’re older and a bit less robust. Consider someone who takes out their first policy aged 60, who will need to pay an extra 60% on top of their premiums in LHC until they turn 70.

The purpose of the Medicare surcharge and Lifetime Healthcare Cover

The goal of these policies is to get more young people into the private healthcare system. While this often isn’t what’s best for young Australians, it does lower premiums for everyone else.

Since young and healthy people are less likely to need hospital cover, the money they put in is less likely to be taken out, which means insurance companies can give lower premiums to higher risk Aussies.

“The more good risks there are in the insurance pool, the better,” Professor Connelly explained.

This is part of the general principle of cross subsidisation that guides healthcare in Australia. Healthy people share the burden of providing healthcare to higher risk patients.

The downside of this is that young people often pay a lot more than they need to, through unnecessary policies, the Medicare surcharge, or LHC loading.

Should young Australians get private cover?

The Medicare levy surcharge and the Lifetime Healthcare Cover (LHC) loading should form part of your calculations when working out whether health insurance is worth it. If you’re 32 and fit, you might not think cover is worth it, but when your premiums are less than the surcharge, it could be a good idea anyway.

For other Australians who earn below $93,000 (or $186,000 for couples), the surcharge doesn’t apply, so you might decide cover isn’t worth it. Keep in mind though that this is likely to mean you will pay more in premiums when you eventually do decide to get insured, which should be another ongoing consideration.

This decision will be different for everyone. Your age, level of fitness, any health conditions, whether you smoke and drink and other personal circumstances (baby on the way, for example) are among the many other factors to consider when you’re making the call.