Private Health Insurance vs Medicare Levy Surcharge: Which Costs Less?

If you are a high-income earner in Australia, you have probably asked this question at some point.

Should I get private health insurance, or should I just pay the Medicare levy surcharge?

People want a simple yes or no, but the answer depends on your income, your family situation, and whether you value keeping more control over timing and options if you ever need treatment.

This article is written to help you decide with clarity. We will cover what the Medicare levy surcharge is, how private hospital cover fits in, and a practical way to decide what makes sense for you.

What Is the Medicare Levy Surcharge?

The Medicare levy surcharge (MLS) is an extra tax paid by higher-income individuals and families who do not have an appropriate level of private patient hospital cover. The tax rate is 1% to 1.5% and applies to income threshold of $101,001 for single and $202,001 for family.

It sits on top of the Medicare levy. The surcharge is designed to encourage higher-income earners to take out private hospital cover, which reduces pressure on the public system.

The key point is that it is not a penalty for not having insurance. It is a tax rule that applies when you meet the income thresholds and you do not have the right type of cover.

Do You Need Private Hospital Cover to Avoid the Medicare Levy Surcharge?

To avoid the Medicare levy surcharge, you need private patient hospital cover that meets the requirements. Extras cover on its own does not help with the surcharge.

This is where many people waste money. They pay for extras because it feels useful, but they still get hit with the extra tax because they do not have the right hospital cover in place.

It is important to note that your hospital cover excess must be $750 or less for singles, or $1,500 or less for families/couples to be compliant.

If your goal is to avoid the Medicare levy surcharge, the decision starts with hospital cover, not extras.

When Is Private Hospital Cover Worth It? The Simple Comparison

For many high-income professionals, the decision comes down to a simple comparison.

What will the extra tax cost you for the year, versus what will the premium cost you for compliant hospital cover?

If the premium is less than the extra tax, then it is usually financially sensible to have the cover rather than pay the extra tax.

If the premium is more than the extra tax, then it becomes a value's decision. You might still choose cover for peace of mind, access, and control, even if it is not the cheapest option on paper.

Example: Is Private Health Insurance Worth It?

Sarah is 35, single and earns $125,000.

Without private hospital cover:

• Medicare levy surcharge: $125,000 × 1.25% = $1,563 per year.
• She gets nothing for this payment. It is simply an additional tax.

With basic private hospital cover:

• Annual premium: approximately $1,400-$1,600.
• Less government rebate (8.095% for her income bracket): saves $120.
• Effective cost after rebate: $1,280-$1,480.
• She saves money compared to paying the extra tax.
• She gains access to private hospital treatment, choice of doctor, and shorter waiting times.

In Sarah's case, private hospital cover is worth it both financially and for the additional benefits.

The Decision Framework That Usually Works

When someone asks me this question, I suggest they approach it in the following order:

Step 1: Confirm whether you are actually in surcharge territory based on the correct income definition and your family situation.

Step 2: Estimate the surcharge cost if you do nothing.

Step 3: Price a compliant hospital cover that meets the requirements (excess under $750/$1,500).

Step 4: Factor in the private health insurance rebate based on your income and age.

Then ask one practical question: If you pay the extra tax, what do you get for it?

The honest answer is that you get nothing extra. It is simply an additional tax.

If you buy cover, you are paying for something that may be useful beyond the tax outcome, depending on how you value access, choice, and timing.

That is where the decision often becomes clearer.

Why Hospital Cover Is Not Only a Tax Decision

It is easy to see private hospital cover as a tax checkbox. But for many high income professionals, it also sits in the "protect the plan" part of wealth building.

Most wealth plans depend on one thing staying true: You stay healthy enough to keep earning, keep saving, and keep investing.

When something unexpected happens, the financial impact is rarely the hospital bill alone. It is:

• Time off work
• Reduced earning capacity
• Delayed projects and career momentum
• The stress and uncertainty that comes with health issues

Private hospital cover does not guarantee better health outcomes, and it is not the right choice for everyone. But it can give you more control over timing and options when you need treatment.

So the real question is not only "Will this save me money on tax?"

The question is also "If something goes wrong, will having this cover help my life recover faster, with less financial disruption?"

If the answer is yes, the premium might feel less like a cost and more like a form of risk management and wealth protection.

Common Mistakes When Choosing Private Health Insurance

Mistake 1: Only buying extras cover. Extras cover (dental, optical, physio) does not help you avoid the Medicare levy surcharge. You must have hospital cover.

Mistake 2: High excess policies

If your hospital cover has an excess above $750 (single) or $1,500 (family/couple), it does not meet the MLS requirements and you will still pay the extra tax.

Mistake 3: Waiting until tax time

The surcharge is calculated daily. If you take out cover in March, you will still pay the extra tax for July-February. Start coverage from July 1 to avoid the full surcharge.

Mistake 4: Assuming all hospital cover is the same

Basic hospital cover policies vary significantly. Compare what treatments are covered, hospital networks, and waiting periods before choosing.

Mistake 5: Ignoring the private health insurance rebate

The government rebate reduces your premium cost significantly. Factor this into your comparison when deciding if private hospital cover is worth it.

Lifetime Health Cover Loading: Another Reason to Consider Hospital Cover Early

If you are under 31, there is another financial incentive to consider hospital cover.

Lifetime Health Cover (LHC) loading adds 2% to your hospital premium for every year you wait to take out cover after turning 30 (up to a maximum of 70% loading).

This loading stays on your premium for 10 continuous years of coverage.

Example:

• Take out hospital cover at age 30 or younger = no loading, base premium
• Take out hospital cover at age 35 = 10% loading on premiums for next 10 years
• Take out hospital cover at age 45 = 30% loading on premiums for next 10 years

Getting hospital cover before age 31 means you pay standard rates and avoid this additional cost.

Final Thought

If you are a high-income professional, this decision is worth running properly. Not because private hospital cover is always the right answer, but because paying the Medicare levy surcharge without understanding your options is one of the easiest ways to lose money quietly.

A clear comparison of your surcharge cost versus your premium cost, plus an honest view of how you value control and continuity, usually leads you to the right call.

The question "Should I get private health insurance?" does not have a one-size-fits-all answer. But with the right framework, you can make an informed decision that aligns with both your financial position and your wealth-building strategy.

Disclaimer: This article provides general information only and should not be considered personal financial, tax, or insurance advice. Medicare levy surcharge rates and thresholds are subject to annual adjustment. Consult with a qualified tax adviser and compare private health insurance policies before making decisions.

About The Wealth Story: We provide plain-English finance advice for Australian professionals on managing money, investments, property, super and SMSF, tax, insurance, and loans and credit.