Each year Private Health Insurers apply to the Minister for Health to have premiums increased from 1 April. While these increases have been approved for many Health Insurers, several have been asked to re-submit their increase requests by the Minister this year, hopefully reducing the increases to many consumers.

The unfortunate consequence of this delay, however, is that all Health Insurers, even those who have an approved increase, are unable to notify their members of the price changes until this is resolved. Why? This is due to a little-known mechanic in the legislation: the Rebate Adjustment Factor (RAF).

What Is the Private Health Insurance Rebate?

The Private Health Insurance Rebate is a Federal rebate designed to support and encourage the uptake of health insurance. Fundamentally, a person would receive a percentage of their premium as a rebate, either through a reduced premium or as part of their annual tax return.

Prior to 2013, Private Health Insurance had a fixed 30% rebate for all Australians holding a policy — the Federal Government paid 30% of all Private Health Insurance premiums.

In 2012, the Gillard Government introduced changes to the Private Health Insurance Rebate. Whilst the government continued to provide rebates to support affordability of Private Health Insurance, the rebates became proportionate (means-tested) to household income (individuals or family) and age. As a result, those with a higher earning capacity and disposable income, as determined by means testing, received lower rebates.

Under these changes, using Samantha (Sam) as an example — a single 30-year-old person on an annual income:

  • Base Tier — 30% rebate when Sam earns less than $88,000
  • Tier 1 — 20% rebate for $88,001 to $102,000
  • Tier 2 — 10% rebate for $102,001 to $136,000
  • Tier 3 — 0% rebate when Sam earns over $136,001

Combined Family earnings had higher annual income brackets, and over-65s are entitled to higher rebates at each tier.

What Is the Rebate Adjustment Factor?

With a fixed rebate percentage for each income tier, the Federal Government rebate cost is tied to premium increases. As premiums increase, so too does the government spend. If the average premium round increase was 6% in a year, the government would contribute 6% more in rebate costs than the previous year.

To stop this, the Federal Government introduced the Rebate Adjustment Factor. In essence, the RAF limits the amount the rebate will increase by, linking it to the average change in CPI rather than premium increases. This effectively caps how much the Federal Government spends on rebates, irrespective of how much it approves Private Health Insurers to increase premiums each April.

If premiums were approved to go up by 6%, but CPI was only increasing by 2%, then the RAF would “adjust” the rebate percentage down so that the increase in government rebate spending would be no more than 2%. The next year, thanks to the RAF, Sam’s rebate is no longer 30% but now 29.45% (as an illustrative example). Unfortunately, this doesn’t work the other way — when CPI has exceeded premium round increases over recent years, the Government has held the RAF at 1, effectively freezing the rebate percentages rather than adjusting them up.

The Hidden Tax on Middle-Income Australians

Since the introduction of the Rebate Adjustment Factor in 2014, the amount contributed by the Federal Government has reduced from 30% in the Base Tier to 24.06% in July 2023. With the average cost per month for a Silver Hospital product around $182.15, that would mean Sam is now paying an extra $10.81 a month — or $129.84 per year — for health insurance solely due to the rebate being reduced through the RAF. This is on top of the actual increase from the premium change that would have been approved by the Government during this time.

The recent changes to the Stage 3 tax cuts in Australia have once again placed a spotlight on the distribution of wealth and created a discussion on how to protect middle and low income earners from increased cost of living.

This reduction in the rebate hits middle-income earners the most. As means testing targets a larger rebate to the Base Tier, for individuals earning below $93,000 (or $186,000 combined as a family) and Tier 1, for individuals earning between $93,001 and $108,000, the decreased rebate from the Government hurts more Australians in the middle income bracket.

Added to this, more Australians now find themselves in these categories. Back in 2014, the average salary in Australia was around $78,000 with the Medicare Surcharge Levy (MSL) starting at $88,000. Fast forward to 2024 and the average Australian salary is set to be above $100,000 — well above the MSL of $93,000 currently set by the Government.

All this combined means more Australians than ever need to hold Private Health Insurance or face paying the MSL, all while the Federal Government continues to reduce how much it contributes towards the Private Health Insurance Rebate.

With policies like this in place, consumers could be forgiven for losing faith in both sides of politics. The Australian Government has effectively created a silent mechanism to continue to reduce how much it funds Australians with Private Health Insurance, while at the same time forcing more middle-income Australians to participate in the system, or face paying the Medicare Surcharge Levy.