Private health insurance rebates: why the budget arithmetic can still work — and how targeting could improve it

Why private health insurance incentives matter to the federal budget

For many years, the federal government has encouraged Australians to take out private health insurance as part of a broader effort to reduce financial pressure on the public health system. The logic is straightforward: if more people use privately funded hospital services, the public system may face lower demand and, in turn, lower costs.

That policy goal is pursued through a mix of incentives and penalties—often described as “carrots and sticks”. On the incentive side, eligible people receive subsidies through private health insurance premium rebates, with the rebate rate varying by factors such as age and income. On the penalty side, some higher-income earners who do not hold an appropriate policy can face the Medicare Levy Surcharge, set at between 1% and 1.5% of taxable income.

The approach remains politically and economically contested, in part because it involves large public spending. The total taxpayer contribution to subsidising private health insurance premiums has been cited as A$6.7 billion, prompting recurring questions about whether that money could be better directed to Medicare or to direct hospital funding.

At the centre of the debate is a practical budget question: when the government subsidises private health insurance participation, do the savings from reduced public health-care spending outweigh the costs of the subsidies and associated revenue effects?

What the analysis set out to measure

An analysis commissioned and funded by the Department of Health and Aged Care sought to answer that question by comparing two sides of the ledger:

• Costs to government: the value of premium rebate subsidies plus the tax revenue forgone when a person who would otherwise pay the Medicare Levy Surcharge instead holds private cover.
• Savings to government: the reduction in public health-care spending when privately insured people use private services rather than relying on the public system.

The savings component is often described as an “offset”—the idea that private insurance participation can offset public expenditure that would otherwise occur if the same people used the public system.

This offset is a key metric in assessing whether the “carrots and sticks” approach is delivering fiscal value. If the offset is larger than the combined costs of rebates and forgone surcharge revenue, the policy can be described as budget-positive on average. If not, the policy may be seen as an expensive way to shift where care is delivered or financed.

How public cost offsets were estimated

To estimate savings, the analysis used private health insurance spending data from 2019 and asked a counterfactual question: what would the government have spent if the people with private health insurance did not have it and instead used the public health system?

As part of the modelling, one key assumption was that one day in a private hospital costs the same as one day in a public hospital. That assumption was based on findings from the Productivity Commission and was used to support a like-for-like comparison of hospital utilisation across sectors.

The calculations also incorporated two additional cost considerations that affect how much the government pays even when care is delivered in the private system:

• Medicare Benefits Schedule (MBS) contributions: the government contributes 75% of the MBS fee.
• Higher prostheses prices in the private system: for example, for hip replacements and other implants.

Taken together, these elements were used to estimate the net public spending avoided when a privately insured person uses private care instead of public care, while still accounting for government contributions that can occur alongside private treatment.

The headline result: an average saving of about $554 per subsidised person

The analysis found that, on average, private health insurance offsets public health-care costs by about $1,400 per person. Importantly, the offset was not uniform across the population. Savings were larger for older people than for younger people, reaching about $4,000 for those aged 75 and above.

To determine whether the policy is financially beneficial to government overall, the analysis then compared these offsets to the costs of supporting private insurance participation.

Those costs include the premium rebates themselves. Rebate rates vary across age and income groups. Two examples used in the analysis illustrate the range:

• A person aged 70 or above earning up to $90,000 attracts a rebate of 32.812%.
• A person aged under 65 earning $105,001–$140,000 receives a rebate of 8.202%.

Using an average annual private health insurance premium of $2,300, these rebate rates translate to government costs ranging from about $755 to $189 per person, depending on the person’s circumstances.

The second major cost component is the Medicare Levy Surcharge revenue the government does not collect when someone who would otherwise be subject to the surcharge instead holds private health insurance. The analysis estimated that this forgone tax revenue ranges from about $970 to $2,400 for single individuals subject to the penalty.

After combining the costs (rebates plus forgone surcharge revenue) and subtracting the savings (the offset), the analysis concluded the incentives represent a net financial gain to government on average. The average net saving was about $554 per person per year for each person supported through these subsidies.

Why older groups drive much of the budget benefit

The results show the budget impact depends heavily on who takes out private health insurance. Older people, who are more likely to use health services, generate larger offsets—meaning their participation in private insurance can reduce potential public spending by more than the government spends to support their cover.

This is one reason the analysis reported “large benefits” to government especially when older people sign up for private insurance. The offset for those aged 75 and above was estimated to be substantially higher than for younger groups, consistent with the finding that offsets rise with age and service use.

In practical terms, this distribution matters because a policy that looks beneficial on average can still contain pockets where the government pays more in support than it saves in reduced public spending. Conversely, it can also contain groups where the savings substantially exceed the costs.

A concrete example of how targeting changes the equation

One example in the analysis illustrates how the balance can shift for particular groups. For an individual aged 75+ earning $105,001 to $140,000:

• The person receives $1,877 in subsidies.
• The person offsets $5,268 in public health spending.
• The estimated net saving to government is $3,391.

The analysis also noted that there are roughly 6,000 people in this age and income group currently in private health insurance, and that only two additional enrolments would make the arrangement budget-neutral in that specific context.

The broader point is not that any single cohort should determine policy settings on its own, but that the fiscal results are sensitive to participation patterns. If incentives are structured in a way that increases take-up among groups with high expected health-care use, the offset can be large relative to the subsidy cost. If incentives mainly increase take-up among groups with lower expected use, the fiscal return may be smaller.

The policy question: can rebates be better targeted?

Even with an average net saving, the analysis raises a strategic question for policy design: what if subsidies were adjusted based on who is more expensive to provide health care for, and who saves the government more money by holding private cover?

This question matters because changing subsidy settings is not costless. Increasing subsidies for a group increases taxpayer costs unless it also changes behaviour—meaning more people in that group take out private health insurance, generating additional offsets. The analysis frames this as a balancing act: higher subsidies can be justified if they lead to enough additional enrolments among groups where the offset is high.

At the same time, the analysis suggests that rebates could be better targeted toward Australians who are more likely to need and use health services. That would align the subsidy more closely with the potential for offsetting public spending.

What “risk-adjusted subsidies” would mean in practice

One proposed improvement discussed in the analysis is the idea of “risk-adjusted subsidies”. Rather than relying primarily on broad categories such as age and income, a risk-adjusted approach would provide extra subsidies to people who are sicker and need more medical care.

In this framework, the subsidy would be based on a person’s characteristics, which could include:

• Age
• Gender
• Income
• Where they live
• Health history, such as prior hospitalisations or use of services

The reasoning is that these are the people who may need private health insurance the most and who may also save the government the most money by holding private cover—because their expected use of services is higher, and therefore the potential offset is larger.

A risk-adjusted subsidy could be computed using a formula based on individual-level spending, designed to estimate how much health care a person is likely to need and what it is expected to cost. The analysis notes that existing work in Australia has shown how such a system can be developed, and that other countries—including the Netherlands, Germany, the United States and Switzerland—demonstrate feasibility.

How this fits into a broader review of private health insurance settings

The analysis is presented in the context of potential change. Private health insurance regulation in Australia is described as being “set for a shake-up”, with the Department of Health and Aged Care seeking input on options.

Within that policy environment, the findings serve two purposes:

• They provide an estimate of the current budget arithmetic, suggesting that the combination of rebates and surcharge settings can produce net savings on average.
• They highlight that the size of the benefit varies considerably across groups, which creates an opening for more targeted design—particularly if the goal is to maximise public value per dollar spent.

In other words, the debate is not only about whether rebates “work” in a narrow sense, but about whether the structure of support is aligned with the people and services that drive costs in the health system.

What the numbers do—and do not—settle

The analysis offers a clear answer to one specific fiscal question: when costs and savings are counted together, the savings from increased private health insurance participation can outweigh the costs of subsidising premiums and the associated loss of Medicare Levy Surcharge revenue. The estimated average net saving is about $554 per subsidised person each year.

However, the same results also underline why the policy remains contested. The offsets vary by age and are particularly large among older Australians, while the costs of rebates and forgone surcharge revenue also vary by income and eligibility. That means the “average” result can mask meaningful differences across the population.

For policymakers, the implication is less about declaring the debate finished and more about identifying where design changes could improve efficiency—especially if subsidies can be better targeted toward those more likely to use health services and generate larger offsets.

Key takeaways

• The government encourages private health insurance through premium rebates and the Medicare Levy Surcharge.
• An analysis using 2019 spending data estimated an average public cost offset of about $1,400 per privately insured person, rising with age and reaching about $4,000 for those aged 75+.
• After accounting for rebate costs (illustrated using an average $2,300 premium) and forgone surcharge revenue (estimated at $970 to $2,400 for single individuals subject to the penalty), the net result was an average government saving of about $554 per person per year.
• The budget benefit appears strongest among older groups, prompting discussion of whether rebates could be better targeted.
• Risk-adjusted subsidies—based on characteristics including health history—are presented as one potential way to align subsidies with expected need and potential savings.

As the government considers options for reform, the central challenge will be maintaining incentives that shape participation while improving how support is targeted—so that public spending on private health insurance delivers the greatest possible offset to public health-care costs.