Exempting pensioners from private health rebate changes won’t make it fairer. Here’s what would

The government wants to remove the extra private health insurance rebate paid to people aged 65 and over to improve intergenerational equity and provide a less complex rebate.

Its first attempt was defeated in parliament. The government has now brought the bill back with no changes.

Our earlier research suggests the change would reduce cover among older Australians only modestly and wouldn’t swamp public hospitals.

Before blocking the bill’s first attempt, the Greens tried to negotiate for an exemption for about 1.2 million older Australians who receive the age pension.

This would have allowed pensioners to continue to gain a higher rebate for their private health insurance. But would it make the policy fairer?

Our new analysis suggests it wouldn’t. A pensioner carve-out would mostly protect comfortable part-pensioners, while missing younger families who are struggling most.

The evidence supports passing the bill as it is, but if concessions are made, they should target those on low incomes, regardless of age.

Remind me, what does the bill propose?

If you buy private health insurance, the government currently pays part of your premiums. How much you get back depends on your age and income.

The rebate for people in the lowest income group is about 24%, but for people aged 65-69 it is 28%, and for those 70 and older it is 32%.

The bill would end this age bonus, so people on the same income would get the same rebate regardless of their age.

But not all pensioners are the same

To investigate the fairness of this change, we looked at the 2022 Household, Income and Labour Dynamics in Australia (HILDA) survey data. HILDA follows thousands of Australian households and records their income, wealth, spending and whether they are struggling to make ends meet.

We looked at people aged 65 and over with private hospital cover for the whole year. After national weights are applied, HILDA counts 2.31 million of them.

Our analysis, which has not been published or peer reviewed, finds a carve-out for pensioners would benefit roughly 560,000 full-rate pensioners with hospital cover (about 500,000 of them on the age pension) and 540,000 part-pensioners.

Full pensioners with private cover are under genuine strain. About three-quarters of their wealth is the family home. The median superannuation balance is about A$10,000, and nearly half have none. Premiums take about 6.3% of their disposable income, nearly double the share for non-pensioners.

But the part-pensioner group is far less strained on every measure we have. One in seven has more than $2 million in wealth (including the family home).

Pensioners without private cover are the worst off. Among uninsured full-rate pensioners, 40% say they are just getting by or poor, and a quarter say they could not find $4,000, if they had to, in a week.

A carve-out does nothing for them, because they have no insurance to begin with.

Income alone is misleading

Shadow Health Minister Anne Ruston said about 2 million insured older Australians lived on less than $37,000 a year.

That sounds like a group in need. But income is a blunt measure for financial security, especially when comparing across generations, because it ignores wealth and living costs.

Among insured people aged 65 and over with before-tax incomes under $37,000, median wealth (including the family home) is $1.18 million, and 61% have more than $1 million.

The real comparison is younger families

The most striking comparison is between older Australians and people aged 25 to 44.

Take people on around $40,000 income per adult, for example, adjusted for household size. Younger adults spend almost three times as much of their income on housing, childcare and insurance as older Australians do.

Younger adults also hold less wealth, and are nearly four times as likely to report financial hardship.

A big contributor to this cost of living gap is housing. Nearly two-thirds of insured 25 to 44-year-olds are paying off a mortgage, compared with fewer than one in ten insured pensioners.

Yet the current rules give a bigger subsidy to a 70-year-old with substantial savings than to a 35-year-old parent on the same income who is paying a mortgage and childcare.

A pensioner carve-out would keep that unfairness in place.

An extra rebate contradicts other policy incentives

One overlooked point in the rebate debate is that younger people already subsidise older people.

Under community rating, insurers must charge everyone the same premium, whatever their age or health.

Older people usually claim more than they pay, and younger people make up the difference.

That’s why policies like lifetime health cover loading try to get younger people to take out insurance. This is a 2% loading added to your premium (for ten years) for every year you didn’t have private hospital cover since the year you turned 31.

A better way to target help

A blanket carve-out for pensioners is poorly targeted. About half the insured pensioners it would protect are part-pensioners, who are far better off than full-rate pensioners.

It would miss uninsured pensioners entirely and offer nothing to struggling younger families.

The government wants to take the savings from the rebate changes and increase funding for aged care. The case for doing so is sound. But if concessions are made, they should target those on low incomes, regardless of age.

To avoid benefits flowing to very wealthy households, the government could consider including deemed income in the income test. Deemed income is an estimated return on wealth, which is commonly added to a person’s regular income to determine their eligibility for benefits such as the age pension. It’s a way to target benefits to those in need, while treating different types of wealth the same.

Our previous research shows that older people in the bottom 25% of earners are the most responsive to rebates. So targeting top earners is unlikely to result in many people dropping their private health cover.

Exempting pensioners would weaken a sensible reform and mostly help people who don’t need it. Parliament should pass the bill as it stands, and deal with genuine hardship through means-tested support, not age.