Why I’m Getting Rid of My Private Health Insurance.

 

This morning, as I watched my monthly $137 auto-debit be whisked away, I once again began to question why i need private health insurance. As a 28 year old male who has never claimed anything (or even gone to hospital), it seems ridiculous to be paying for nothing. Everyone had always told me that I MUST have health insurance, but as the years dragged on, I began to suspect that merely putting aside the money each month ‘just in case’ could be more beneficial. So in a bout of pure procrastination, I began to dig in.

Here’s the question – is paying for individual treatments as they arise cheaper and more beneficial in the long-term than paying health insurance every month plus gap payments (if you need it at all).

Assuming you look after yourself, private health cover only begins to become beneficial between 40-50 years of age as your risk of hospitalisation increases – with some exceptions for women in their late 20’s due to child bearing. When it comes to benefits, benefits are minimal for both sexes. Almost always, over time you’re better off financially to use the public health system and save the money instead.

 

What is insurance?

The insurance business is fundamentally that of betting on risk. Not unlike gambling, you are paying a business over time in the hopes that should something happen, they will cover your losses.

The reason I say hope, is because the insurance industry is renowned for its predatory behaviour. Many people who purchase health insurance believe they are covered – only to find that when something goes wrong, their claim is rejected for one of a million different reasons.

It seems to me that most people forget that the insurance business is, well, a business…and that as a business, it exists to turn a profit.

So while you’re gambling on something going wrong, the insurance company is making a bet that nothing will – and they price their policies based on how statistically likely it is that you’ll need their help.

Ultimately, their goal is to pay you as little as possible, and retain as much as possible – which means more profit for them. Hence, the worse your health or the more you want to cover, the more expensive it will be.

 

What is Bulk-Billing (for Australians)?

Bulk-billing is the term used in Australia to refer to healthcare services that are provided at no cost to the patient. Rather than paying a fee for your visit and then seeking a partial rebate through Medicare, your medical practitioner will bill Medicare directly, leaving you with no out-of-pocket expenses.

While most practitioners offer bulk-billing in some form or another, they don’t always offer it to everyone and there may be a different criteria practice to practice.

For instance, while there are some dedicated bulk-billing practices – lot’s of doctors may decide to ‘mixed bill’. This is where they bulk bill some patients and not others – effectively subsidizing one patient with another. For instance, they may choose to offer bulk billing for Health Card Holders or Seniors, but not for healthy working adults in their prime.

Most importantly for us however, is what’s not covered by bulk billing. Medicare does not cover extras such as dressings or vaccines. It also does not cover cosmetic medicine or anything related to work.

 

The Data

In my caffeine fueled quest for some hard numbers, I found a particularly useful report from the Australian Prudential Regulation Authority (APRA) documenting the statistics of private health insurance in 2020.

Health insurance is primarily broken down into two categories: Hopital Cover & General Treatment (dental, physiotherapy, optometry etc.).

Hospital Cover

In the past 12 months, insurers paid $3,806 million in hospital treatment benefits – however, most of this is to adults between 60 and 84 years old.

As seen above, older age groups have a higher claiming rate. They also state that the rise in benefits in the 20–39 age cohort is due to increases in female benefits associated with child bearing.

The average benefit paid up until 70 years of age is under $3,000, and for those under 50 – less than $1,000.

General Treatment

The age differences noted with hospital cover are much less poignant when examining general benefits.

Overall in the 12 months prior to March 2020, the average person received $434 in benefits, with the highest component of that payment being dental treatment ($231).

Looking at the above graphs, we see a clear spike in the 10-14 year old demographics, presumably because this is when dental concerns (braces) and optical concerns (glasses) begin presenting themselves in younger children. After this, benefits paid then drop off again until around 40.

Out of Pocket Payments (Gap Payments)

But let’s not forget that insurance doesn’t cover everything. On top of your insurance payments, you will almost always have to pay a ‘gap’ payment per service/episode.

In 2019/2020, the average hospital treatment resulted in a gap payment of $324.04, while the average general treatment incurred an out-of-pocket payment of $50.46.

The amount of gap for medical services varies depending on the specialty group. The specialty group with the largest out-of-pocket payment was plastic/reconstructive with an average gap of $414.

As a result, the average out-of-pocket payment for medical services was $193 where a gap payment was payable (meaning, on top of your insurance payments, you’ll usually also pay $193).

 

The Mathematics

Using the data for admitted patients provided by the Australian Institute of Health and Welfare (AIHW), if you’re a male between 14 and 44 (a 30 year period) your odds of ending up in hospital is approximately 18%. For females, it is slightly higher due to child bearing, but still comes in at only 34%.

So let’s assume you’re paying the average premium for a single person with basic hospital cover and extras. This is $1644 per year.

Over a 30 year period, you will pay:

With Insurance: $49,320

Without Insurance: $0

So in order to make insurance a worthwhile deal, you’d need to spend more than $49,320 in medical fees that the insurance company covers (remember, not everything is covered and you still pay the gap or some treatments outright).

Now, if you’re in the 14-44 age bracket and end up in hospital, statistically this will be due to an accident (injury, alcohol poisoning, toxic drugs)

According to the Admitted Patient Care Report, the average cost of such treatments is $5,700 (However, if this does happen to you, you may not even get much benefit from your private health insurance since the ambulance will nearly always take you to a public hospital).

But let’s pretend they don’t, and then let’s say you end up in hospital twice during our 30 year time period:

Total With Insurance: $49,320 + Gap Payments

Total Without Insurance: $11,400

This means you would have to end up injured, in a private hospital, approximately 10 times over the course of 30 years to break even.

That’s a bad wrap –  but what about general treatments?

We’ll use dental as an example since it’s the most common benefit claimed.

If you go to a non-bulk billed dentist, a general checkup on average costs $231.

Most young, single entry level insurance policies have a 60% rebate of the cost. So if you get a checkup every 6 months, you’ll pay $93 each time – a total of $186 a year. Your cost for insurance for the year is still $1,644, but now we add the gap payments for a total of $1,860.

With Insurance = $1,860

Without Insurance = $462

Alrighty, let’s try another one.

Let’s say you don’t get hospital cover, but get extras only cover.

Australian Unity’s lowest level plan costs $21.50 per month – $258 per year, with a cheeky *assumption* of a 4% discount for using direct debit (seriously).

This time we’ll look at therapy – so this plan provides a $350 combined limit for all therapies… with a set return of $25 per therapy.

Now, the average physiotherapy appointment costs around $120. So if you go once a month – you’ll pay your $21.50 for cover, and $98.5 for the appointment, in essence, breaking even. However if you go more than 14 times that year, you’ll be required to pay full price as it will exceed the limit of their benefits.

 

Conclusion

Under almost all circumstances, you’re better off going with the public health system until you’re around 40. It’s at this point you’re more likely to require specialised care or be hospitalised, which results in more claims – at which point higher hospital care packages may help you save money, which you can also afford now due to your $50k of savings.

With the mathematics so clear, you have to wonder why so many of us do indeed have private health. My conclusion is that the industry relies on our inclination towards loss aversion and the halo effect bias. Humans are primed to avoid losing that which we possess, including our money and health – so by offering us a perceived way to mitigate this loss for a small monthly fee, we are inclined to accept even if we are worse off for it.

This is further proliferated by the halo effect bias. Health insurance companies have strong positive messaging in their marketing about how they’re here to help and look after us. Because of this, we’re more inclined to believe their altruistic and minimize the business aspect of their operation.

So the question becomes – What will you do? Will you keep your private health insurance?

 

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