Purpose of the Bill

The purpose of the Private Health Insurance Amendment (Income Thresholds) Bill 2021 (the Bill) is to amend the Private Insurance Act 2007 (the PHI Act) to:

• extend the pause on indexation of the income thresholds which determine private health insurance (PHI) rebate amounts and Medicare Levy Surcharge rates for the 2021–22 and 2022–23 financial years and
• adjust the formula for the re-commencement of annual indexation from 1 July 2023.

This implements a 2021–22 Budget measure.[1]

Background

Private health insurance

Australia’s health system is a mix of public and private health care.

Private health insurance can help with the cost of treatment in a private hospital or as a private patient in a public hospital. It can give patients greater choice (for example, of doctor and timing of treatment), as well as help with the cost of ancillary treatments not covered by Medicare such as dental, optical and physiotherapy.

It is not mandatory to have private health insurance but there are Commonwealth incentives for people to have it; namely, the private health insurance rebate and the Medicare Levy Surcharge. Under Medicare, all Australians are eligible for subsidised medical treatment and free treatment as a public patient in a public hospital.

Hospital and general treatment (sometimes called ancillary or extras) policies can be purchased separately or through combined policies. As at 31 March 2021:

• 11,396,181 people, or 44.2% of the population, had hospital treatment cover
• 13,886,876 people, or 53.8% of the population, had general treatment cover.[2]

The PHI Act is the primary law setting out requirements for private health insurance and health insurers.

Private health insurance rebate and Medicare Levy Surcharge

The Howard Government introduced the PHI rebate and Medicare Levy Surcharge in the late 1990s with the objective to stabilise the level of participation in private health insurance in Australia, which had steadily declined following the introduction of Medicare in 1984.[3]

PHI rebate

The PHI rebate was introduced in 1999 and provides a government rebate on private health insurance premiums for hospital, general treatment and ambulance policies. For many years, the rebate was 30% of a person’s PHI premium, with higher rebates for those aged 65 and over introduced from 2005.[4]  There are two ways to receive the rebate:

• as a premium reduction through the private health insurer
• as a tax offset when lodging an annual tax return.[5]

Most people receive the rebate as a premium reduction. This is delivered through the Premiums reduction scheme set out in Part 2-2 of the PHI Act, which states that the purpose is ‘to encourage people to take out, and continue to hold, private health insurance’.[6]

In 2021–22, the Government expects to spend $6.7 billion on the PHI rebate.[7]

Medicare Levy Surcharge

The Medicare Levy Surcharge (MLS) was introduced in 1997 and is an additional levy, on top of the Medicare Levy, imposed on taxpayers who earn above a certain income and who do not have private hospital cover.[8]

According to taxation statistics, in 2018–19, nearly 330,000 individuals paid the MLS, with revenue totalling around $415.4 million.[9]

Introduction of income testing

The Gillard Government introduced tiered PHI rebates and MLS rates based on income in 2012. As explained in the Bills Digest on the relevant Bills introducing these measures:

When these measures were announced in 2009, the Government claimed they would make PHI ‘fairer’ because those with a greater capacity to pay would do so. As well they would make PHI more fiscally sustainable into the future. By reducing the PHI rebate to higher income earners, the Government expected to make substantial savings.[10]

Table 1 below shows the tiered PHI rebates and MLS rates that applied from 1 July 2012.

Table 1: Private Health Insurance incentive tiers with effect from 1 July 2012

Source: Department of Health (DoH), ‘Means testing the Private Health Insurance Rebate and Medicare Levy Surcharge (Fairer private health insurance incentive tiers’, Private health insurance circular 14/12, DoH Website, 17 March 2012, (Trove).

Section 22-45 of the PHI Act provides for annual indexation of income thresholds, based on changes in average weekly ordinary time earnings (AWOTE) each financial year. The AWOTE is published twice-yearly by the Australian Bureau of Statistics.[11] Annual indexation means that the income thresholds take into account growth in incomes over time.

Previous indexation pauses

Following the introduction of the income tiers, indexation occurred in accordance with the PHI Act for the 2013–14 and 2014–15 financial years.

The Government announced a savings measure in the 2014–15 Budget to pause the indexation of the income thresholds for the MLS and the PHI rebate for three years from 1 July 2015; this was extended in the 2016–17 Budget for a further three years.[12] The pause on indexation is reflected in subsections 22‑45(3A) and (3B) of the PHI Act.

The effect of a pause in the indexation of income thresholds is that as incomes generally rise over time, more people cross into the next tier than would have been the case if the thresholds were indexed. Crossing into a higher tier means a lower PHI rebate and higher MLS liability. The longer indexation is paused, the more significant this effect is.

Current thresholds and rates

Table 2 shows the income tiers and rates that apply as at 27 May 2021 for the PHI rebate and MLS.

Table 2: Private Health Insurance incentive tiers as at May 2021

Note: The PHI rebate percentages are lower than those seen in Table 1 due to the application of a Rebate Adjustment Factor (RAF) since 2014. [13] The operation of the RAF is separate to the determination of the income thresholds and is not being changed by this Bill. The RAF is calculated by the Department of Health and takes into account the difference between the change in the consumer price index and the industry weighted average increase in premiums. [14] This has resulted in a reduced rebate for consumers over time.

Source: Commonwealth Ombudsman, ‘Australian Government Private Health Insurance Rebate’, Private Health website, n.d.

Review of policy settings

In announcing the continued pause on the indexation of income thresholds, the Government has noted that this decision will allow time to undertake a review into the current policy settings.

The Budget Papers describe this as ‘a review of the MLS Policy settings’.[15] The Department of Health’s Budget factsheet on the measure suggests it will be broader and also include the PHI rebate, referring to ‘a study examin[ing] the effectiveness of the current regulatory settings’ and stating that ‘A range of studies being funded through this Budget will provide advice and insights which can be used to better formulate policy surrounding MLS settings [and] the PHI Rebate … in the future’.[16] The Explanatory Memorandum states the pause ‘will provide an opportunity to undertake a detailed study of settings of the PHI rebate and the MLS’.[17]

To date, no further detail on the scope, timing and objectives of the review, or who will be conducting the review, has been published.

There have been growing calls for a review or changes to PHI rebate and the MLS. The Australian Medical Association has called for Government to reconsider MLS levels and thresholds, and for additional work to establish the impacts on PHI participation if the rebate were to be increased.[18] Private health insurer industry body, Private Healthcare Australia, called for an increase in the MLS and gradual restoration of the PHI rebate to 30 per cent in its 2020–21 pre-Budget submission.[19] A 2019 Grattan Institute report called for an overhaul of current PHI incentives, including gradually phasing out the MLS, focusing the PHI rebate on older Australians and allowing insurers to charge younger people less than older people for the same level of coverage.[20]

There are sound reasons for a review of current settings. Because the income thresholds and rate of the MLS have been unchanged for some time, while premiums have continued to increase, the effectiveness of the MLS as an incentive to take-up private health insurance has been diminishing. For those just over the liability threshold (for example, singles earning just over $90,000 per year), the cost of the MLS (around $900 per year) is generally less than the cost of hospital policies. A search on the government comparison website, privatehealth.gov.au, for the most basic hospital policy (with very limited benefits) for a single 35 year old earning $95,000 identified 12 available policies ranging from $948 to $1,380 per year (after a PHI rebate of 16.4 per cent).[21]

Alongside this,  the pause, for several years, to the indexation of income thresholds means the level at which people become liable for the MLS is trending towards average incomes rather than remaining focused on higher income earners as was the case when the measure was introduced.

Concerns about the affordability of PHI, particularly among younger people who are typically healthier and less likely to claim benefits, drive arguments to increase the PHI rebate. Given this would come at significant cost to the Commonwealth, the impacts and benefits of such a change need to be well understood.

Committee consideration

Senate Selection of Bills Committee

At its meeting of 13 May 2021, the Senate Selection of Bills Committee deferred consideration of the Bill until its next meeting.[22]

Senate Standing Committee for the Scrutiny of Bills

The Scrutiny of Bills Committee had no comment on the Bill.[23]

Policy position of non-government parties/independents

In the second reading debate, the Shadow Minister for Health, the Hon Mark Butler MP, indicated that the opposition will be supporting the passage of this Bill. However, he noted that the continued pause on thresholds has had a ‘substantial financial impact on middle-income households’.[24]

The House of Representatives passed the Bill on 1 June 2021.[25]

The position of other parties and independents is not known at this stage.

Position of major interest groups

There has been limited stakeholder reaction regarding the decision to extend the pause on indexation.

Private health insurer industry body, Private Healthcare Australia, did not comment specifically on the decision to extend the pause in its response to the 2021–22 Budget package, instead focusing on the associated review and potential future changes, noting:

The government’s decision to review the current policy setting for the Medicare Levy surcharge [and] the PHI Rebate … signals further commitment to improving the affordability of private health care.[26]

Financial implications

The Explanatory Memorandum states that ‘the Government is investing $30.6 million over four years to continue to make private health insurance simpler and more affordable for Australians’.[27] This figure appears to relate to separate expenditure measures under the 2021–22 Budget measure Private Health Insurance — building the sustainability of the sector and improving affordability for patients related to private health insurance.[28]

The Budget papers state that not resuming indexation for a further two years ‘will achieve efficiencies of $303.9 million over four years from 1 July 2021’.[29] The Budget Papers also show receipts to the Australian Taxation Office of $41 million over three years from 2022–23 from this measure.[30] This appears to relate to increased revenue as more people become liable to pay the MLS (or liable to pay a higher rate) than would be the case if indexation recommenced from 1 July 2021. This may be offset to some degree by PHI rebate payments for people who choose to take up private health insurance rather than pay the MLS.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible because it promotes the right to health.[31] In its assessment the Government noted that the Bill is ‘designed to support the sustainability of private health insurance and accordingly is intended to promote individual’s access to health services’.[32]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Committee had not commented on the Bill.[33]

Key issues and provisions

Maintaining current thresholds will increase costs for some people

This Bill will have no impact for most people with private health insurance, but will adversely affect those whose incomes, over the next two financial years, rise across the thresholds that would otherwise have increased according to the indexation formula. Specifically:

• those whose incomes rise to tier 1 ($90,001 for singles; $180,001 for families) will become liable for the MLS (at a rate of 1 per cent) and no longer receive the full PHI rebate
• those whose incomes rise to tier 2 ($105,001 for singles; $210,001 for families) will be liable for an increased MLS of 1.5 per cent and receive the lowest PHI rebate
• those whose incomes rise to tier 3 ($140,001 for singles; $280,001 for families) will be liable for an increased MLS of 2 per cent and no longer receive the PHI rebate.

While the previous pauses on indexation of income thresholds were described as savings measures,[34] this time the measure is framed as ‘maintaining current policy settings’ and intended to ‘ensure continuity of current arrangements’ while a review is undertaken.[35] It is not apparent why retaining the current settings is necessary for the review. While not described as a savings measure, the measure will restrain expenditure growth, saving the Government $303.9 million over the next four years.

Former Department of Health senior public servant Charles Maskell-Knight criticised the Budget documentation on the measure as ‘deceptive, if not secretive, about the decision’, stating:

… it is disingenuous for the Budget Paper to ascribe the $303.9 million in savings to “efficiencies”. It is simply shifting $303.9 million of the cost of private health insurance from the Government to policy holders.[36]

Overview of key provisions

Freezing income thresholds for two more years

Item 1 repeals and replaces section 22-35 of the PHI Act. Existing section 22-35 sets out the tier 1, tier 2 and tier 3 income thresholds for singles that were in place when thresholds were first introduced, and states the amount is indexed annually in accordance with section 22-45. Proposed section 22-35 specifies the income thresholds for each tier for singles for 2021–22 and 2022–23 (which reflect the thresholds that have been in place since the 2014–15 financial year) and states the amount is indexed for later financial years under section 22‑45. This amendment will also apply to family income thresholds as defined in section 22-40, which provides that the family thresholds are double the equivalent singles thresholds (with a formula for increasing the threshold if a person has two or more dependents who are children).

The effect of these changes is to maintain the current income thresholds for a further two financial years, before indexation in accordance with section 22-45 commences.

Item 2 is consequential to Item 1, and updates the example given in subsection 22-40(4) for calculating the threshold for a person with three dependents who are children.

Adjusting the formula for annual indexation

Current situation

Section 22-45 of the PHI Act sets out the process for calculating the annual indexation of income thresholds.

Currently, indexation occurs by multiplying the various thresholds set out at section 22-35 (which reflect the amounts for the 2008–09 financial year for tier 1, and for the 2010–11 financial year for tiers 2 and 3) by the indexation factor.[37] There are currently separate provisions setting out the indexation factor for singles tier 1 thresholds and singles tier 2 and 3 thresholds.

The indexation factor for the singles tier 1 threshold is calculated by dividing the estimated full-time adult average weekly ordinary time earnings (AWOTE) for the middle month of the quarter ending on 31 December for the current year by the AWOTE for the middle month of the quarter ending on 31 December 2007.[38]

The indexation factor for the singles tier 2 and 3 thresholds are calculated by dividing the AWOTE for the middle month of the quarter ending on 31 December for the current year by the AWOTE for the middle month of the quarter ending on 31 December 2009.[39] The use of a different base amount with respect to tier 1 and tiers 2 and 3 reflects that the tiers as set in section 22-35 related to different financial years, and means that they are indexed at a different rate.

Subsections 22-45(3), (3A), (3B) set out when indexation does not occur. Subsection 22-45(3) states the amount is not to be indexed if its indexation factor (as specified in subsection 22-45(4) is 1 or less. Subsections 22-45(3A) and (3B) are the provisions by which income thresholds have remained at 2014–15 levels. Subsection 22-45(3A) states the amount is not to be indexed for the 2015–16, 2016–17, 2017–18, 2018–19, 2019–20 or 2020–21 financial years and subsection 22-45(3B) provides that if an amount is not indexed because of subsection 22-45(3A), the amount for the financial year is the amount for the most recent financial year for which the amount was indexed. This meant that the tier 1, tier 2 and tier 3 thresholds for the 2014–15 financial year, which was the last year that the thresholds were indexed, have been the threshold amounts for the years 2015–16, 2016–17, 2018–19, 2019–20 and 2020–21.

Proposed amendments

Items 3-9 repeal and replace elements of section 22-45 to recommence indexation from the 2023–24 financial year.

Item 3 repeals subsection 22-45(1) and substitutes a provision stating that an amount mentioned in section 22-35 is indexed for the 2023–24 financial year, and later financial years, in accordance with this section. This amendment clarifies that references to ‘amount’ in section 22-45 refers to an amount specified in section 22-35 (currently section 22-45 refers to the ‘amount for the 2008–2009 financial year’) and reflects that indexation of the thresholds will now occur from 2023–24 onwards.

Subsection 22-45(2) outlines how amounts are to be indexed. Specifically, the amount is to be multiplied by its indexation factor (set out in subsections 22-45(4) and (5)) and then rounded down to the nearest multiple of $1,000. Item 4 repeals and replaces paragraph 22-45(2)(a) to clarify that ‘amount’ refers to an amount specified in section 22-35 (which sets out the 2021–22 and 2022–23 thresholds) and removes the reference to subsection 22-45(5) to reflect that singles tiers 1-3 thresholds will now be indexed at the same base rate.

Item 6 repeals subsections 22-45(3), (3A) and (3B), and replaces these with new provisions that state that the amount is not to be indexed when the calculated indexed amount is less than the original threshold amount or the indexed amount for the previous financial year. This prevents income thresholds from being lower than the previous financial year.

Item 7 amends subsection 22-45(4), substituting a revised indexation factor formula using the AWOTE for the quarter ending 31 December 2021 as the baseline. This clarifies that instead of recommencing indexation using the AWOTE for the quarter ending 31 December 2007, the AWOTE for the quarter ending 31 December 2021 applies, which will result in a lower rate of indexation than if the previous rate had applied. By amending the thresholds in section 22-35 to reflect the amounts in place prior to the pause in indexation, and restarting indexation using the AWOTE for the quarter ending 31 December 2021 as a baseline, the Government has effectively frozen the thresholds from 1 July 2015 to 1 July 2023.

Item 8 repeals subsection 22-45(5) to remove the different indexation factor for singles tiers 2 and 3 single thresholds.

Item 10 provides that the amendments apply in relation to the 2021–22 financial year and later financial years.

Concluding comments

The Bill implements a 2021–22 Budget measure to continue the pause on indexation of income thresholds for the PHI rebate and MLS for a further two years, bringing the total duration of the pause to seven years. It also resets annual indexation arrangements to commence from 1 July 2023.

While not affecting the majority of people with private health insurance, the proposed amendments will mean that as incomes rise across the tiered thresholds, more people will be eligible for lower PHI rebates and face higher MLS rates than would be the case if indexation of income thresholds were to proceed as currently provided by the PHI Act. Adjustments to the formula for indexation to use current income thresholds provide clarity on how indexation will recommence from the 2023–24 financial year. The measure will restrain growth in the cost of the PHI rebate to the Government, with an estimated saving of $303.9 million over four years. Much of this saving will be borne by policy-holders in the form of higher PHI premiums and MLS payments for those without cover. The Government’s stated intention to review these policy settings, which have been largely unchanged for several years, may lead to future changes.