Australia’s Federal Government is proposing to eliminate the higher private health insurance rebate for individuals over 65, aiming to standardize support based on income rather than age. The Private Health Insurance Amendment (Modernising the Private Health Insurance Rebate) Bill 2026, introduced by Health Minister Mark Butler, targets approximately 3.2 million people, making the rebate uniform across all age groups.
Butler argues that the current system is unfair, as two households with the same income receive different levels of government support based solely on their age. The bill is expected to save around $3 billion over four years, with about $1.6 billion of those savings coming from pensioners. However, states, insurers, and other health groups have expressed opposition to the proposal, while health economist Stephen Duckett has dismissed their concerns as “henny penny” catastrophising.
Assessing the Potential Impact
The debate surrounding the proposed change centers on the concept of elasticity, or how people adjust their private health insurance coverage in response to price changes. According to Treasury modelling, around 44,000 people, or 0.4 percent of membership, are expected to drop their coverage. However, Finity Consulting estimates that the change would reduce insurers’ claims by $2.3 billion, implying a larger behavioral response than Treasury assumes. Members Health calculates that the effective premium increase for affected members would be around nine percent, or $1,000 to $1,600 per year for some older couples. Despite these predictions, it is impossible to forecast the future with certainty, and the uncertainty surrounding the outcome is a concern for both sides of the debate.
Older Australians with private health insurance are the most costly members, with the offset, or estimated saving to the public purse, ranging from $3,000 to $5,000 per year for members aged 75 and over, compared to under $1,000 for all income groups aged under 54. As a result, those who choose to leave their private health insurance coverage are likely to be the highest-cost members, placing a significant burden on the public healthcare system. This highlights the need for policymakers to consider the practical impact of the proposed change on individuals and the healthcare system as a whole.
Subsidy Design
Stepping back from the private health insurance debate, it is essential to consider the fundamental question of why health insurance is subsidized in the first place. Subsidies are typically implemented to improve affordability, as is the case with Medicare. A subsidy is not a judgment on the quality of the underlying product but rather a means to ensure that individuals have access to necessary healthcare services. There is broad consensus among health economists that subsidies should be designed to track the risk of the individuals receiving them, as risk is a key determinant of healthcare costs. Age and sex are significant predictors of healthcare costs, while morbidity measures, such as hospital encounters or pharmaceutical use, are even stronger indicators.
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Risk and Responsibility
The impact of the proposed change is not solely determined by elasticity or spending alone but rather by the interplay between these factors and the cost of the subsidy itself. A policy that has a minimal effect on take-up among a group with a large offset can still have a significant fiscal impact, depending on the specific numbers involved. This highlights the need for caution and careful consideration of the potential consequences. Ultimately, the states will bear the cost of any shift from private to public healthcare, and they will require funding and capacity to manage this change, regardless of the Commonwealth’s savings on the rebate.
Insurers are already responding to funding pressure by renegotiating benefit arrangements with hospitals, rather than waiting to see how the proposed change plays out. This shows the complexity of the issue and the need for a subtle approach that takes into account the various stakeholders and their interests.
Economic Rationale for Risk-Adjusted Subsidies
Subsidies exist to improve affordability, similar to how taxes fund Medicare. A subsidy does not judge the quality of the underlying product. Health economists agree that subsidies should track the risk of the people receiving them because risk is cost. How sick a person is is the best signal of what they will cost the system.
The Bigger Picture
Regardless of the outcome of the debate, it is clear that the Australian healthcare system is facing significant challenges, including lengthy waiting times for elective surgery and specialist appointments, rising out-of-pocket costs, and a private hospital sector under financial strain. The rebate is just one aspect of the broader private health insurance regulatory environment, which also includes the Medicare Levy Surcharge and the Lifetime Health Cover loading.
Finity’s actuarial review of these settings suggests that the current system cannot deliver the desired outcomes, including lower out-of-pocket costs, broader scope of cover, and a sustainable public-private mix, without more fundamental reform. Removing the age-based rebate tier is unlikely to have a significant impact on these underlying issues, and policymakers should prioritize more full reform efforts.