Media coverage of the Federal Government’s planned private health insurance reforms has been voluminous. Yet some critical questions have been largely unexplored, reports Croakey journalist Jason Staines.
Jason Staines writes:
The political fight over the Federal Government’s proposed changes to private health insurance (PHI) rebates has brought together an unlikely collection of opponents, including the Coalition, Greens, crossbench parliamentarians, private health insurers and advocacy organisations.
But amid the controversy about the financial impact on older Australians and the consequences for public hospitals, a more fundamental question has received comparatively little attention: is Australia’s enormous public subsidy for PHI money well spent?
The Commonwealth is forecast to spend $7.9 billion on PHI rebates in 2026–27. The Government’s proposed changes would remove the additional rebate paid to Australians aged 65 and over, bringing their assistance into line with that received by younger people on equivalent incomes.
The measure would save almost $3 billion over four years, with the Government proposing to direct the savings towards expanding aged-care services.
It would not abolish rebates for older Australians, despite what some have said.
The debate has largely concentrated on the potential losers: older Australians facing higher premiums, people who might abandon private health insurance, and public hospitals that could experience additional demand.
Less attention has been directed towards the broader subsidy, who benefits from it, whether it improves healthcare, and what else Australians might achieve with the money.
How did we get here?
Australia’s current system of PHI incentives largely dates to reforms introduced under the Howard Government. These included the Medicare Levy Surcharge, the introduction of a 30 per cent premium rebate in 1999, Lifetime Health Cover and, in 2005, higher rebates for Australians aged 65 and over.
The incentives were intended to encourage private insurance participation and support a mixed public–private healthcare system.
However, longtime Croakey contributor Charles Maskell-Knight PMS, who has followed PHI policy over some decades, questions how successful the original incentives were.
He recalls that the initial rebate and other financial incentives made little difference to participation, while Lifetime Health Cover, which penalised people for delaying their purchase of insurance, was followed by a substantial increase.
“This suggests that the making PHI cheaper did not result in more people buying it – the threat that it would be more expensive is what did the trick,” he told Croakey.
However, Maskell-Knight acknowledges that withdrawing an established subsidy could have consequences very different from those associated with its introduction. He argues that removing the general rebate could substantially increase premiums and prompt healthier policyholders to leave, creating further pressure on premiums for those remaining.
That distinction matters because a subsidy may be relatively ineffective at encouraging new participation while becoming increasingly difficult to remove once households and insurers have become accustomed to its existence.
Value for money?
Private Healthcare Australia (PHA), representing the private health insurance industry, argues that the rebate is an important investment in a mixed healthcare system that provides patient choice, supports private hospitals and reduces demand on public services.
In response to queries from Croakey, PHA pointed to the substantial contribution of private hospitals, which it says perform around two-thirds of planned surgery and provide significant proportions of rehabilitation, mental health and joint-replacement services.
PHA also cited three economic studies supporting the value of government subsidies. A 2023 analysis by Finity, undertaken as part of a government-commissioned review, concluded, on the basis of economic modelling, that PHI rebates could deliver net financial savings for government, with estimated avoided public hospital costs exceeding subsidy expenditure after accounting for Medicare Levy Surcharge revenue.
PHA also pointed to research by University of Newcastle academics Professor Francesco Paolucci and Dr Josefa Henriquez, which similarly estimated an average net government saving of $554 annually for each subsidised privately insured person, based on modelling of the costs associated with privately insured healthcare.
A third study, commissioned by PHA from Evaluate in 2017, concluded that subsidising private health insurance could produce greater economic welfare benefits than equivalent marginal government expenditure on public healthcare.
The studies provide an economic case for the rebates, but their findings require careful interpretation.
The Finity analysis depends partly on assumptions about people moving from privately funded to publicly funded care in the absence of subsidies. The Newcastle estimate also depends on modelling potential public expenditure rather than directly observing the consequences of removing the rebate. Evaluate’s report, meanwhile, explicitly states that its analysis concerns expenditure efficiency, not comparative healthcare quality or health outcomes. It incorporates the economic benefits attributed to reduced waiting times.
There is also a distinction between the value of services delivered by private hospitals and the additional benefits generated specifically by public subsidies for insurance.
Some people would retain their insurance without rebates. The relevant policy question is therefore not simply how much care the private sector provides, but how much additional care, public-sector relief and improved access are attributable to the government’s expenditure.
Another critical question
Do more insured patients mean shorter public waiting lists?
Research by University of Melbourne health economist Professor Yuting Zhang and colleagues challenges one of the central arguments for encouraging private insurance participation.
The researchers examined linked Victorian hospital admission and elective surgery waiting-list data from 2014 to 2018, investigating whether higher levels of private insurance coverage translated into shorter waits for public patients.
They estimated that increasing coverage from 44 to 45 per cent, equivalent to approximately 65,000 additional insured Victorians, reduced average public hospital surgical waiting times by just 0.34 days – around eight hours – against an average wait of 69 days.
The effects differed somewhat between surgical specialties but remained relatively small.
Zhang told Croakey that government subsidies to encourage PHI participation were not an effective way to reduce public hospital waiting times. She also said evidence that subsidies improve health outcomes or overall system efficiency had not been established, although further research was underway.
Her team’s research suggested several possible explanations for the limited waiting-time effect: insured patients may still choose public treatment to avoid out-of-pocket costs; specialists may prefer private practice; and some complex procedures may be less readily available in private hospitals. These explanations were not directly tested in the study.
Importantly, the findings do not necessarily contradict all the economic benefits identified by PHA’s preferred research. Reduced government expenditure and shorter public hospital waiting times are different measures, and Zhang’s study examined the relationship between insurance participation and waiting times, rather than the fiscal or hospital-system consequences of abolishing the rebate.
Nevertheless, the findings raise questions about whether increasing private insurance participation is an effective strategy for improving timely access to public healthcare.
Who benefits?
The distribution of subsidies raises another set of questions.
In separate research, Zhang and colleagues examined tax records involving more than 300,000 people between 2001 and 2012 to assess the effects of the higher rebates introduced for older Australians in 2005.
They estimated that a 10 percent reduction in premiums through higher rebates produced only a one to two percent increase in insurance participation among Australians aged 65 and over in the following two years.
They also found that lower-income people aged 65–74 were the most responsive to the additional assistance.
Zhang argues that many higher-income Australians would purchase insurance regardless of the rebate, effectively receiving a public subsidy for a decision they would have made anyway. She recommends targeting rebates towards the lowest 25 percent of income earners, regardless of age.
Even Finity’s review, which found financial benefits from the rebate, identified reduced value from subsidies for higher-income earners and suggested changes to improve their targeting.
But the financial circumstances of older Australians vary considerably, and removing additional assistance could create genuine hardship for some.
The Government’s own impact analysis also raises questions about the effectiveness and equity of the existing subsidy arrangements.
Prepared by the Department of Health, Disability and Ageing in May 2026, the analysis describes the rebate as inequitable and poorly targeted, arguing that older Australians receive higher subsidies than younger people on equivalent incomes despite being more likely to retain their insurance regardless of the additional assistance.
The analysis cites Zhang’s 2023 research on older Australians’ responses to insurance incentives and concludes that the higher age-based rebates do not align with the scheme’s objective of encouraging people to take up and retain PHI.
However, the Department’s criticism is directed principally at the additional age-based subsidies, rather than the rebate system as a whole. The analysis maintains that private insurance participation helps relieve pressure on public healthcare and supports retaining the broader rebate.
It also considered a more extensive reform that would have reduced rebates for middle-income earners and removed them for some higher-income earners. The Government instead selected the narrower age-based change, which the department assessed as having a smaller impact on insurance participation and policyholders.
Equity concerns
Leanne Wells, a health policy and consumer advocacy expert (who joined the Croakey team earlier this year), says inequity in access to healthcare is particularly apparent in elective surgery.
“There is certainly inequity of access to healthcare between those who hold private health insurance and those who don’t, particularly in regard to elective surgery,” she said.
“If you are in need of a hip replacement for example, and you are without private health insurance you can face an exceptionally long wait compared to those with private insurance.”
The disparity in access raises a further question about whether government incentives supporting private insurance help reduce inequities across the healthcare system or reinforce or exacerbate existing differences between insured and uninsured patients.
COTA Australia, the peak national organisation representing those aged 50 and over, says its research indicates some older Australians are considering cutting spending on essentials to retain their insurance.
Chief executive Patricia Sparrow told Croakey she has serious concerns about affordability, particularly for pensioners and people on fixed incomes.
“People should not have to cut back on groceries, medicines, dental care, physiotherapy, GP appointments, or their power bills, just to find the money to keep their health insurance,” she said.
The question is whether assistance should be directed towards those experiencing financial hardship or continue to be differentiated principally by age, subject to the existing income thresholds.
Leanne Wells says the complexity of the public–private health system, and the various incentives encouraging insurance participation, make a wider review necessary.
“Recent debates about the decision to remove the additional subsidy for older Australians serves to highlight the case for a wider examination of the public benefit of the rebate and the opportunity costs of this expenditure.”
As Charles Maskell-Knight reported The Zap this week, some medical groups recently supported a motion from independent MP Andrew Wilkie, seconded by Dr Monique Ryan, calling for the Government to establish an independent statutory Private Health System Authority within the health portfolio.
However, its proposed functions “do not include oversight or regulation of medical gap payments, which are a major issue for many policyholders when they use their insurance”, noted Maskell-Knight.
Opportunity cost
The opportunity cost of the rebate has been largely absent from the political argument over the Government’s plan to reduce the age-based subsidy.
The immediate question concerns the Government’s proposed $3 billion saving, which it says would help finance expanded aged-care services.
Its own impact analysis explicitly links the rebate savings to four areas of aged-care investment: capital subsidies for new and refurbished residential aged-care facilities, increased accommodation supplements for providers, 20 additional specialist dementia care units and expansion of the Hospital to Aged Care Dementia Support Program, and expanded access to the Support at Home program.
The analysis states that the additional funding for these services would not be possible without the rebate savings.
However, it does not establish whether these investments would be cancelled, delayed or funded through alternative measures if the legislation fails.
Writing for Croakey, health economist Dr Luke Slawomirski illustrated how greater aged care capacity might also benefit public hospitals.
Using an estimate of approximately 3,500 older patients occupying public hospital beds while awaiting aged-care placements, he calculated that reducing their number by 10 per cent could release approximately 128,000 hospital bed-days annually.
In theoretical capacity terms, that would be equivalent to tens of thousands of additional elective procedures, although staffing, operating theatres, patient complexity and other constraints would determine how much additional treatment could actually occur.
PHA, meanwhile, cites modelling predicting that the rebate changes would cause 62,000 older Australians to abandon hospital cover in the first year and approximately 200,000 to downgrade their policies. It estimates around $260 million in additional hospital costs would be transferred to state and territory governments.
These estimates illustrate different potential consequences of the policy, but neither establishes what its net impact on public hospitals would be.
But the bigger question around opportunity cost concerns the overall subsidy.
Could comparable expenditure deliver greater improvements to health and healthcare systems through direct investment in public hospitals, primary healthcare, specialist access, prevention or public health?
What might $8 billion achieve if directed towards income support, poverty reduction or other social determinants of health? Or if this investment went to improving communities’ climate resilience and adaptation?
The scale of the annual subsidy becomes apparent when compared with other areas of health expenditure. The Australian Centre for Disease Control has budgeted expenditure of $242.8 million in 2026–27 – around three percent of the $7.9 billion cost of PHI rebates.
The same federal budget provides $31.1 million over three years to continue bowel cancer screening for Australians aged 45-49, and $15 million over two years for a national skin cancer prevention campaign.
These comparisons do not establish that redirecting subsidies would necessarily produce better health outcomes. Nor could the full rebate necessarily be withdrawn and redirected without changes to insurance participation, private hospital activity and public expenditure.
But they illustrate the scale of the public investment in private health insurance relative to some of the Government’s other health priorities.
Why is reform so difficult?
The breadth of political and community resistance to the age-based rebate changes illustrates the difficulty of altering arrangements that have become embedded in Australia’s healthcare financing system.
COTA argues that older Australians should not be required to choose between affordable healthcare and adequate aged-care funding, describing the Government’s presentation of the trade-off as a false choice.
Health Minister Mark Butler maintains that difficult budget decisions are necessary to fund the expansion of aged care. He has argued that households on identical incomes should receive identical PHI support, irrespective of age.
But his public statements have not resolved what alternative funding arrangements would be required if the proposed savings fail to materialise.
Maskell-Knight offers an explanation as to why the political argument has been so one-sided: “The benefits of the expenditure to be financed from reducing the rebate are diffuse, while the losses suffered by over 65s are direct and concrete.”
Slawomirski has similarly argued that the Government failed to explain the potential benefits of redirecting expenditure, allowing the debate to focus almost exclusively on those facing higher premiums.
Yet the broader question remains unanswered.
Australia’s private hospitals provide substantial healthcare services, but that does not establish that the current subsidy is the most effective way to support them. Equally, the prospect of disruption from removing existing rebates does not, by itself, demonstrate that every element of the system should be retained.
The possibilities extend beyond wholesale abolition or preserving the existing arrangements. Zhang proposes targeting assistance more closely to income, while Maskell-Knight suggests that subsidising hospital services directly might prove more efficient than subsidising insurers.
Australia’s private hospitals play a substantial role in providing healthcare. But that doesn’t settle the question of whether subsidising insurance is the most effective and equitable way to support that contribution.
Nor does it answer the larger question of whether $8 billion a year could deliver greater benefits for health and aged care if spent elsewhere in the health or other portfolios – and whether a serious examination of that possibility can survive the challenging politics of reform.
See Croakey’s archive of articles on private health insurance
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