Understanding The Gap

There is a common misconception that having private health insurance means means you don’t need to pay when you go to hospital or use your extras. While it is possible that you won’t have to pay anything towards a hospital admission or your extras service provider, more than likely there will be additional costs.

These extra costs don’t mean that private health insurance isn’t worth it – in some cases private health insurance can save you tens of thousands of dollars. But if you’re considering whether you need private health insurance, we recommend understanding the reality of what you may need to pay.

Hospital excess or co-payment

Most policies will require you to make an upfront contribution to your hospital stay. This will either be in the form of an excess or a co-payment. An excess is a one-off payment (usually $250 or $500) per hospital admission, usually capped at one payment per person per year. Some policies have a $0 excess, but these are usually more expensive. A co-payment is similar to an excess, but rather than a single amount upfront, you are required to contribute to each day’s hospital stay. The co-payment will differ depending on the policy, but may be $50 a day, and there will often be a cap on the number of days that the fee is payable for. Many policies don’t have a co-payment component (excess seems to be more popular), and it’s rare that policies will have both.

Excesses and co-payments are transparent costs – you know exactly what they will be when you take out a policy. Either factor this into your purchasing decision, or choose one of the many policies that don’t charge an excess or co-payment.

Hospital gap or out of pocket

When your private health insurance covers you for a hospital admission, you will be covered up to a certain amount depending on your admission. Because each doctor can set their own fees, you may end up paying significant out of pocket costs to cover the difference between the total cost and what your insurer covers.

Many insurers have agreements with doctors where you will not need to pay any out of pocket costs – known as ‘no gap’. Often doctors and insurers will have other agreements where you will have a ‘known gap’ that is likely to be quite small. Some fees charged by doctors may be above the threshold for a ‘known gap’, and it is in these situations of an ‘unknown gap’ where you are at risk of being significantly out of pocket.

The good news is these out of pocket costs don’t need to come as a shock. Speak to your insurer before going in to hospital – they can guide you towards a ‘no gap’ or ‘known gap’ doctor to minimise and potentailly eliminate your out of pocket expenses.

As of June 2018, the average contribution that privately insured patients needed to make towards their hospital stay was $308.73 (APRA). Note that this is the full patient contribution, and includes any excess, co-payment and out of pocket costs.

Extras out of pocket

Similar to hospital gap or out of pocket costs, you may only be partially reimbursed for extras services that you use. For example, you may receive $30 towards your physiotherapy appointment, $200 towards a pair of glasses, or $60 towards a dental check-up. If these amounts cover the full cost of your treatment/visit then you pay nothing, otherwise you will need to pay the difference.

Extras cover is often referred to as a budgeting tool rather than insurance. Whether you agree with this definition or not, it’s a useful way to frame what you may be able to get back (and what you may need to contribute) on extras. With extras cover, you are unlikely to get back significantly more than you paid in premiums – it’s certainly possible that you will, but it’s not likely. Hospital cover, on the other hand, may pay you nothing for many years (if you’re lucky enough not to go to hospital), but then it may cover you for tens of thousands of dollars if you need surgery. This is why a new pair of glasses is often mostly (or fully) covered by insurance, but you get back relatively little on major dental work that costs thousands.

This isn’t to say extras cover isn’t worth it – it definitely can be. But understand what you’re likely to be covered for, and how you can make extras cover work best for you. The good news is that there’s a reasonable degree of transparency around how much of your extras expenses may be covered, and you usually have a pretty good idea of what extras services you are likely to use. We recommend you do some rough maths to make sure you’re getting the best value.

Many insurers will also have owned, aligned or affiliated clinics or practices – you may have seen dentists and optometrists with insurer branding. If you take advantage of these providers, you can cut down on out of pocket expenses significantly, and get more value from your cover.

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