Introduction by Croakey: The intense media and political focus on the Federal Government’s relatively inconsequential reforms to private health insurance is a distraction from the real reform challenge, according to a health policy expert.
Below Charles Maskell-Knight PSM outlines why meaningful reform of private health insurance is needed, and how to achieve this.
Will this risk-averse Government have the appetite for such reforms?
“There comes a time when sticking Band-Aids on a dysfunctional limb no longer works,” says Maskell-Knight.
Charles Maskell-Knight writes:
Private health insurance has been in the news a lot recently, as lobby groups representing insurers and older people persuaded the Senate to drop legislation implementing the Government’s budget decision to align the premium rebate paid to people aged 65 and over with the rebate paid to younger people on the same income.
Within a day, Health Minister Mark Butler reintroduced the same legislation in the House.
Despite febrile suggestions from the sector that the change will lead to many older people dropping or downgrading their health insurance, the impact is likely to be inconsequential.
Independent academics at the University of Melbourne believe fewer than 50,000 people will drop their cover. Given underlying growth in coverage, this means there will still be several hundred thousand more people covered in April 2027, after the Government’s decision is to take effect, than there were a year previously.
The experience of the 1990s is relevant here: reports from the Private Health Insurance Administration Council showed the total number of people covered by private health insurance falling steadily quarter after quarter in the face of steep premium rises, while the number of people aged over 65 with coverage remained steady.
The debate about the premium rebate has distracted from more important issues facing the sector.
Claims and counter-claims
For the last two years the Government has been engaging in a protracted process to identify options to amend the private health insurance framework.
This follows a sustained campaign in 2024 by the Australian Private Hospitals Association (APHA) claiming financial stress on private hospitals as a result of underfunding by private health insurers – a claim denied by the Australian Heath Funds Council (AHFC).
The Government, which had stopped collecting private hospital sector financial data following the 2016-17 financial year, invited hospitals to provide data to a Private Hospital Sector Financial Health Check.
Only 40 percent of hospitals responded, and the results were so ambiguous that both the APHA and AHFC claimed vindication for their position.
In late 2024, the Government established a Private Health Sector CEO Forum “to identify and develop short and medium-term options to support the sector’s long-term sustainability so that it can continue to serve the health care needs of Australian patients”.
In early 2025 it released a consultation paper identifying “short-term reform options… which can contribute to alleviating financial pressures on private hospitals and improve the value of private health insurance without putting pressure on policyholders’ premiums; are able to be agreed immediately by Government; and can be substantially progressed or fully implemented within six months”.
The first objective is oxymoronic: if the financial pressure on private hospitals is to be relieved by increasing payments from insurers, the premiums charged by insurers will need to increase once they have run down any excess reserves.
Following the consultation paper, nothing happened for 18 months, other than a series of increasingly irate APHA media releases urging action to compel insurers to increase their payout ratios.
Then on 2 July this year, the Government issued another consultation paper on Private Health Sector Reform, with a range of “proposed reforms to improve the private healthcare sector following feedback received through the CEO Forum”.
Virtually all the options included in the consultation paper from January last year – selected on the basis they could be “substantially progressed or fully implemented within six months” – were included again.
Given the diversity of interests within the sector, it is incredibly naïve to assume any particular option will “improve the private healthcare sector” as a whole. Many options in the paper will result in increased benefits flowing to private hospitals, which will result in additional funded care for some patients, while increasing premiums for policyholders.
Others will redistribute the cost of comprehensive “Gold” insurance policies across the insured population more generally, meaning the cross-subsidy from younger people purchasing lower cost selective products to older people buying comprehensive products would increase.
In its response to the consultation paper AHFC commented: “While it can be tempting to generate a laundry list of problems and reform targets in a particular sector, regulatory reform of the private health sector should have a strategic focus and not get distracted by Band-Aid measures and quick fixes.”
Decades of props
Band-Aids and quick fixes are nothing new in this sector.
Indeed, the current regulatory framework reflects the accretion of over 40 years of measures intended to prop up Australia’s unusual system of voluntary community-rated private health insurance.
As set out in section 55-5 of the Private Health Insurance Act, the principle of community-rating forbids insurers from discriminating between policyholders on the basis of any characteristic that could influence their use of health services.
The principle is often paraphrased as requiring all policyholders to be charged the same premium for the same product.
Australia is one of only two OECD countries with a system of voluntary community-rated private health insurance. (The other is Ireland, which essentially copied the Australian system when it began to regulate private health insurance in the 1990s.)
In other OECD countries, community rating is only applied to private health insurance in countries such as the Netherlands where the state effectively uses private insurers as a vehicle for delivering a national insurance scheme, and requires people to buy insurance.
In such schemes it would be inequitable for older people or people in poor health to contribute more towards a national scheme, so the rules mandate community-rated premiums augmented by risk-rated government subsidies.
The problem with a voluntary community-rated scheme is that it requires younger low-risk policyholders to pay actuarially unjustified premiums to support older high-risk policyholders.
It is essentially a Ponzi scheme, with benefits to older people being paid for by newer entrants to the risk pool. And it only works if enough young people enter the pool.
Government policies to encourage young people into the pool include the Lifetime Health Cover premium loadings for people initially buying insurance after age 30, and the Medicare Levy Surcharge applied to people earning more than $105,000 who do not purchase insurance.
When the Medicare Levy Surcharge was introduced, the threshold of $50,000 was well over 40 percent above average weekly earnings. Then Health Minister Dr Michael Wooldridge said in December 1996 the measure was intended to “provide encouragement to high income earners who can afford to take out private health insurance to do so”.
Beyond junk policies
Fast forward 30 years, and the current threshold is $3,000 less than average weekly ordinary time earnings. In other words, average workers are being penalised if they do not buy private health insurance.
Insurers have worked within this framework to develop products – often called junk policies – that exempt policyholders from the Medicare Levy Surcharge and Lifetime Health Cover loadings, while providing cover for a very limited range of health services.
About 4.2 million people are covered by these policies, which contribute over $3 billion a year through the risk equalisation arrangements to cross-subsidise products offering comprehensive cover.
However, as premiums increase faster than CPI and the Medicare Levy Surcharge threshold, it will soon be cheaper for many people to pay the one percent levy rather than purchase junk policies – at which point the Ponzi scheme will begin to collapse.
The AHFC has a solution to this problem – increase the Medicare Levy Surcharge applying at the threshold to 1.5 percent of taxable income from the current one percent to ensure buying junk policies is cheaper than paying the levy.
If the Government is serious about intergenerational equity – as Treasurer Dr Jim Chalmers claims – this option should be discarded.
The Government should instead allow insurers to discriminate on the basis of age (but not other factors such as health status), abolish the risk equalisation arrangements together with the Medicare Levy Surcharge, Lifetime Health Cover and the universal premium rebate, and require all policies to offer comprehensive cover.
Younger people would then be able to buy comprehensive insurance for not much more than they are currently paying for junk products.
And if private health insurers can’t succeed in marketing comprehensive cover to young people for well under $40 a week, they should give up and grow cabbages.
The premium rebate should be redirected and paid as an age-adjusted amount to reduce premiums for current policyholders aged over 55 to the level paid by 50-54 year-olds.
Many people now aged over 55 were captured by the huge government publicity campaign around Lifetime Health Cover when it was introduced in 2001, and were implicitly promised premium stability over their lifetimes. Continuing a subsidy for this group would deliver on that promise – and the cost would reduce over time as the cohort died.
Allowing age-rated insurance would be a bold move for a Government that seems intent on making as few waves as possible. But there comes a time when sticking Band-Aids on a dysfunctional limb no longer works.
Author details
Charles Maskell-Knight PSM was a senior public servant in the Commonwealth Department of Health for over 25 years before retiring in 2021. He worked as a senior adviser to the Aged Care Royal Commission in 2019-20. He is a member of Croakey Health Media, and provides the weekly column, The Zap. Follow on X/Twitter at @CharlesAndrewMK, and on Bluesky at: @charlesmk.bsky.social.
See Croakey’s archive of articles on private health insurance
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