The private health insurance rebate is an important element in maintaining the attractiveness of private health insurance membership. The government rebate subsidises the cost of private health insurance premiums (hospital, general, and ambulance policies). It is usually applied in the form of an upfront discount to the consumer on the price of the premium, although it can be claimed back through the tax system. The rebate amount varies, depending on income levels and age.
In 2017–18, the federal government expects to spend around $6.4 billion on the rebate, according to Budget Paper no. 1 (p. 6-21).
The rebate was introduced by the Howard Government in the late 1990s, as one of a suite of measures to encourage consumers to take up private health insurance, because membership had declined after the introduction of Medicare. The other measures were Lifetime Health Cover (which imposes a 2% premium loading for each year after the age of 31 a consumer delays taking out cover) and the Medicare Levy Surcharge (a means-tested surcharge on top of the Medicare Levy for higher income earners who decline to purchase private health insurance).
Prior to 2014, the rebate was applied at a flat 30% (35% for 60–65 year olds, and 40% for those over 70). But from 2014, the calculation of the rebate changed. Instead of it being calculated as a fixed proportion of the premium, it was indexed using a Rebate Adjustment Factor (RAF) which represents the difference between the Consumer Price Index and the industry weighted average increase in premiums. Means-testing was introduced in 2012 so that those on higher incomes (earning over $90,000) receive a lower rebate. Indexation of the income thresholds that determine the rebate entitlement has been frozen since 2014.
In February 2017, the Health Minister approved an industry weighted average premium increase of 4.84% (the lowest in recent years). The next premium increase will be announced early in 2018.
As the table below shows the amount a person on income below $90,000 (where means-testing does not apply) receives under the rebate (the ‘rebate entitlement’) has steadily fallen since 2013.
Table 1: Rebate entitlement (Tier 0, income below $90,000)
Source: Australian Taxation Office
Meanwhile, the proportion of the population covered by private hospital insurance has declined from 47.4% in June 2015 to 45.8% in September 2017. The erosion of the value of the rebate, along with the increasing cost of premiums have been blamed for this fall—although other factors such as growing out of pocket or gap payments, increasing complexity of insurance products, subdued income growth, and patient experience may also be at play. Declining private health insurance membership, particularly among young people means that the pool of healthy members from which insurers can draw their revenue in order to meet member’s claims, shrinks. This places pressure on private health insurers who may then seek to increase premiums to meet their obligations.
While the rebate is usually characterised as a benefit to consumers in the form of discounted premiums, it also acts as a significant subsidy for the private health insurance sector. Division 279 of the Private Health Insurance Act 2007 allows private health insurers to claim reimbursement from the federal government for the revenue foregone from offering discounted premiums to consumers. John Menadue and Ian McAuley have described incentives such as the rebate as ‘simply…a form of industry assistance’. Without the rebate, and other incentives, it is possible that some private health insurers might struggle financially.
The main expense for private health insurers is meeting the cost of claims from policy holders. In 2016–17, private health insurers paid out $19.8 billion in benefits to members, according to the industry regulator, APRA. Their main revenue source is income from member premiums. In 2016–17 the industry reported total premium revenues of $23.0 billion, which includes reimbursement of discounted premiums.
In 2016–17, the rebate was worth around $6.3 billion. In terms of the private health insurance industry this amount is equivalent to 27.4% of total industry premium revenue. However, in line with the fall in the rebate amount for consumers, the amount the rebate contributes to insurers’ revenue has also fallen. In 2012–13, the rebate was worth $5.5 billion to private health insurers, or equivalent to 30.5% of industry revenues of nearly $18 billion.
In 2013, the Coalition promised to restore the rebate to its full value, when ‘responsible’ to do so, however, this policy was not implemented. By the 2016 election the Coalition commitment was to ‘maintain the current private health insurance rebate’ while also making ‘clear improvements to ensure its helping to deliver consumers value for money’.
The most recent package of reforms to private health insurance announced by Health Minister Hunt include a proposal to offer premium discounts of up to 2% annually to young people aged under 30 on hospital cover (previously called for by health insurer BUPA). Whether such changes will be sufficient to encourage take-up of private health insurance by young people, many of whom face poor employment prospects and low wage growth, has been questioned. It is also not clear if insurers will receive reimbursement for the discounted premiums offered to young people, similar to existing Division 279 arrangements. But if this is permitted the cost of the rebate to taxpayers may grow, unless offset by lower premiums.
Government spending on the rebate is forecast to grow, albeit at a slower rate than in previous years, which means it will continue to be an impost on the budget. This means that the Government faces a tricky balancing act in meeting its commitments to make insurance more affordable, while maintaining a viable private health insurance sector and a return to surplus.