Time to read : 3 Minutes

The government annually devotes an astounding $6.7 billion to private health insurance rebates. But who really benefits from them?

Key points (TL;DR):

• Some say the current rebate set up only benefits those in higher income brackets who are more likely to have private health insurance.

• There's only a small rise in private health insurance purchases among older Australians with increased rebates, suggesting an ineffective and costly strategy.

• Targeted rebate distribution aimed at lower income demographics could increase the uptake of insurance.

• The current annual spend on rebates could be put to better to use by funding improvements to public hospitals and additional care programs.

How do these rebates work?

Introduced in 1999, these rebates were intended to offset 30% of private health insurance costs for all citizens, regardless of age or income. In 2005, the Howard government increased the rebate rate to 35% for people aged 65-69 and to 40% for those aged over 70, regardless of how much they earned.

Sounds like a good idea. What's wrong with it?

What started with good intentions may now disproportionately benefit groups that would likely have private health insurance regardless of the rebate (ie: people in higher income brackets).

According to a recent study, increasing rebates for over-65s leads to only a modest increase in private health insurance purchases within this demographic.

Data shows that for every 10% reduction in premiums due to increased rebates, just 1–2% more people over 65 will buy private health insurance within two years. The argument is then, that this rebate strategy is inefficient and costly and unlikely to increase health insurance uptake by older people.

So, how do we fix it?

More targeted rebate distribution to lower-income earners could improve the level of uptake. Current thresholds can be applied to people earning up to $144,000 and families earning up to $288,000. There are now calls to decrease these income thresholds to focus rebates on those who might most be in need of them. Additional research indicates that higher-income earners will invest in private insurance regardless of available rebates.

A federal health department consultation report suggests removing rebates for singles earning over $108,000 and families earning over $216,000.

Focusing on those who need this assistance most can optimise the effectiveness of these massive annual subsidy amounts while promoting wider participation in the private insurance market.

The Bottom Line

If the rebate thresholds were to change and the uptake of private health cover increased, the plan could be considered a success, or at least more effective. Otherwise, it would make more sense to redirect rebate funds to improve public hospitals and expand public healthcare and education programs.

Go deeper: What is the annual private health insurance premium increase in 2023?