Introduction by Croakey: Some health policy experts are backing the Federal Government’s plans to remove the higher private health insurance (PHI) rebate for people aged 65 and over.
As Croakey has reported previously, Charles Maskell-Knight PSM supports the move, as have Professor Stephen Duckett AM, Professor Yuting Zhang and Dr Luke Slawomirski.
It’s fair to say, however, that the reform’s list of public supporters is shorter than those arguing against it.
Below health policy academics Josefa Henriquez and Professor Francesco Paolucci suggest that much of the rebate debate has overlooked bigger health reform priorities, such as addressing waiting times for elective surgery and specialist appointments, rising out-of-pocket costs and gap payments, and a private hospital sector under real financial strain.
“Spending political capital, parliamentary time and a Senate inquiry on a change whose net effect on patients is, at best, a rounding error, is a poor use of reform bandwidth,” they write.
Josefa Henriquez and Francesco Paolucci write:
Health Minister Mark Butler has put before Parliament a bill to remove the higher private health insurance (PHI) rebate for people aged 65 and over. The Private Health Insurance Amendment (Modernising the Private Health Insurance Rebate) Bill 2026 would standardise the rebate regardless of age for roughly 3.2 million Australians.
Butler’s rationale is framed as fairness: “Two households on the same income receive different levels of government support based solely on their age. That’s simply not fair.”
The change is also a budget measure, projected to save around $3 billion over four years, which the Government wants to redirect into aged care. Recent analysis by the Parliamentary Budget Office found that about $1.6 billion of the savings will come from pensioners.
In essence, the dollar increases in premiums hit them proportionally much harder than a working 65-year-old with other income.
States, insurers and other health groups have lined up against it. Health economist Stephen Duckett has dismissed the opposition as “henny penny” catastrophising, and Professor Yuting Zhang and colleagues at the University of Melbourne told the Senate inquiry that the alarm is “not evidence-based.”
Who’s right? We think both sides are arguing past a couple of missing pieces of the puzzle: what a subsidy is actually meant to do, and why the real problems with private health insurance and the Australian healthcare system are barely touched by this reform at all.
Will people actually leave?
Much of the debate turns on the concept of elasticity: how much people change their private cover in response to a price change. Zhang and colleagues’ modelling, and Duckett’s reading of it, suggest the change would be marginal, meaning not many older Australians would drop cover over a few hundred dollars a year.
Treasury’s own modelling projects around 44,000 people, or 0.4 percent of membership, will exit. An arguably low number.
Not everyone agrees on the number. Finity Consulting, the actuarial firm the Department itself has engaged in earlier reviews of these settings, estimates the change would cut insurers’ claims by $2.3 billion, more than the rebate currently costs for that age group, implying a much larger behavioural response than Treasury assumes.
Further, Members Health puts the effective premium increase for affected members at around nine percent, or $1,000 to $1,600 a year for some older couples.
But elasticity of take-up is only half the story.
We also need to understand where people go when they do leave: the substitution between private and public hospital care. Even a small percentage shift matters if it lands on a public hospital system already under strain from record elective surgery waits.
The honest answer is that no one can predict the future.
That uncertainty cuts both ways: it’s exactly why neither “the sky is falling” nor “nothing will happen” is a defensible position on the modelling alone.
What people cost when they stay
The other half of the story is what those who stay in private health insurance cost the system, and here the numbers are much less contested.
In a study we conducted with Finity, among other work, we confirmed a well-known pattern: older Australians with private health insurance are the highest cost members.
The offset, that is, the estimated saving to the public purse from having someone privately insured rather than relying solely on Medicare and public hospitals, was $3,000 to $5,000 a year for members aged 75 and over, compared with under $1,000 for all income groups aged under 54.
That’s not a surprising finding. Healthcare costs vary enormously by age, and older members are the ones whose private cover is doing the most fiscal work.
So, regardless of exactly how many people move, those who do are disproportionately the highest-cost members.
Designing subsidies
Step back from private health insurance for a moment and let’s ask a more basic question: why do we subsidise health insurance at all?
In general, subsidies exist for affordability, the same reason we use taxes to fund Medicare. Not everyone can pay for cover unassisted, and bigger, broader risk pools have real benefits regardless of whether they sit in the public or private system.
A subsidy is not a verdict on whether the underlying product is “good” or “bad.”
There is broad consensus in health economics about how a subsidy should be designed: it should track the risk of the people receiving it, because in healthcare, risk is cost. The evidence on what predicts healthcare costs is remarkably consistent across countries: age and sex matter.
Morbidity measures, capturing hospital encounters or pharmaceutical use, are the strongest predictors available. In plain terms: how sick you are is, by a wide margin, the best signal of what you will cost the system, and therefore of who a subsidy should be targeting.
Age is a weak proxy for that. If the goal is a well-targeted subsidy, morbidity should be doing far more of the work.
Income is far more contentious. Healthcare spending is not neutral with respect to income, since wealthier people often spend more, not because they’re sicker, but because they have better access, more time and higher health literacy, while lower-income groups are often under-represented in spending relative to their needs.
Using income uncritically to set subsidies risks entrenching the very disparities in access it is meant to correct. A thorough examination of this discussion can be found in this book.
If there is a genuine economic question buried in here, it’s about the efficient use of resources, a fundamental concern in health economics generally.
Risk-adjusted subsidies, built around a defined budget, would give governments a deliberate, non-arbitrary framework for calculating support that evolves with real healthcare needs, rather than one built on age brackets that happen to be administratively convenient.
Who actually carries the risk
None of this is determined by elasticity alone, or by spending alone: it is the product of the two, weighed against what the subsidy itself costs.
A policy that barely moves take-up among a group with a very large offset can still have a meaningful fiscal effect, in either direction, depending on exactly where the numbers land.
That is not a reason for confidence on either side of this debate. It’s a reason for caution.
At the end of the day, the states are the ones caught in the middle. If people shift from private to public care, states carry the cost of that shift and need the funding and capacity to manage it, regardless of what the Commonwealth saves on the rebate line.
Insurers, for their part, are already pulling other levers in response to funding pressure, including renegotiating benefit arrangements with hospitals, rather than waiting to see how this plays out.
The real problem
Whether any of the predictions turns out closer to right is, in a sense, beside the point, as it does not change what is actually broken in Australian healthcare: blown-out waiting times for elective surgery and specialist appointments, rising out-of-pocket costs and gap payments, and a private hospital sector under real financial strain.
What is clearer too is that the rebate is only one lever among several: Australia’s private health insurance regulatory environment also includes the Medicare Levy Surcharge, and the Lifetime Health Cover loading.
The most important conclusion from Finity’s actuarial review of these settings was not about any single lever. It was that the rebate, the Medicare Levy Surcharge and Lifetime Health Cover, considered together, cannot deliver what Australians actually want from the health system, lower out-of-pocket costs, broader scope of cover, and a sustainable public-private mix, without more fundamental reform.
None of these problems are meaningfully touched by removing an age-based rebate tier. Spending political capital, parliamentary time and a Senate inquiry on a change whose net effect on patients is, at best, a rounding error, is a poor use of reform bandwidth.
And to conclude, there is also a question nobody in this debate has really answered: what happens if removing this rebate does produce the adverse effects its critics predict?
A meaningful shift onto public hospitals, rising premiums pushing out low-claiming members, private hospitals losing volume. Who is accountable for responding, and how quickly? Do you increase funding for public hospitals? Reinstate the rebate? Let premiums rise as low-cost members leave and high-cost members stay, pushing up prices further on products like Gold cover?
The bill, as it stands, answers none of these questions.
Author details
Josefa Henriquez is Lecturer at University of Newcastle. She was formerly an advisor in the Minister’s Cabinet at the Ministry of Health of Chile, where she focused on the development of the health insurance reform act.
Francesco Paolucci is Professor of Health Economics & Policy at University of Newcastle, Australia, and at University of Bologna, Italy. Previously he was Head of Health Policy at Sir Walter Murdoch of Public Policy and International Affairs, Murdoch University, and the Chief Advisor Health Reforms to Minister of Health in Chile in 2019. He was a member of the Italian Technical Committee for Allocation of National Health Budget. He is a board member of IHACPA.
See Croakey’s archive of articles on private health insurance
Add Comment