In my book Slow and Steady: 100 wealth building strategies for all ages, Strategy 14 (in the Chapter intended primarily for young adults) is “Don’t buy private health insurance”. After I had finished writing the book and had sent the text to the printer for printing, the Minister for Health made an unexpected announcement. He said that young people under the age of 30 will receive “big discounts” of up to 10% compared to the standard adult rate, if they join a private health insurance fund. Under the terms of the reforms, I understand that those who hold health insurance under age 30 will be eligible for a 2% discount for every year that they hold the policy, up to a maximum discount of 10%. The discount will continue through their 30s but will phase out after they turn 40.

Ooopss! After the Minister’s announcement, should Strategy 14 be scrapped? STOP THE PRESSES??

I don’t think there is any need for that. When the next edition of Slow and Steady comes out, yes, it will reference the cheaper premiums for young adults. But the “big discounts” won’t make much of a difference to the discussion of the “don’t buy private health insurance” financial strategy.

Why not?

Well firstly let me acknowledge that the decision as to whether to buy private health insurance or not is not purely a financial decision. Of course, private insurance can bring benefits if you need hospital treatment. Naturally, Australians don’t like having to wait in long queues for treatment in a public hospital, and they do like the nicer, calmer environment of private hospitals, and if they have their “own doctor” then they like being attended to in hospital by that doctor rather than by someone they have never met before. And many of us might like our own private room if we needed hospital treatment rather than public ward accommodation (this might not be so much of an issue for younger people though). Fair enough. So if you are a young adult and you were teetering on the edge of buying insurance but were only put off by the high cost in a very close decision, you might well decide that the 10% discount makes a difference and you might now choose to sign up.

But for the great majority of young people: forget it. I’m an actuary but I’ve never practised as a health insurance actuary so I don’t have access to the right data to back up this claim but I strongly suspect that the true relativity between the claims costs of a young adult aged less than 30 and the average claims cost of all insured persons is lower than 0.9. A report in the Australian Financial review cites UBS analyst calculations that the 10% discount for 20 to 30 year olds will mean that Medibank’s Core Hospital policy premium will be reduced from $930 to $840 once a young member is entitled to the maximum discount (which will still take 5 years’ membership of the fund to attain). But this is still more than 50% higher than the cost of claims by 20 to 30 year olds under that table, which is $558 per year. Under Australia’s “community rating” health insurance principle, until now, a healthy 25 year old adult who has only ever been inside a hospital to visit a sick elderly relative has been charged the same premium for their health insurance (for the same “table” of cover, in the same state) as a 95 year old who has spent 18 of the last 24 months in hospital. And as an attempt to rectify the cross-subsidies inherent in “community rating”, which overcharges the young and healthy to subsidise the frail and elderly, the “big” 10% discount announced by the Health Minister only goes part of the way.

The young have figured out that they can save a motza by simply NOT buying health insurance at all, and they have deserted the health funds in droves. If they get sick and need to go to hospital they go to public hospital and get treated for free. They know that if they pay for private health insurance, and then if they get sick they go to a private hospital and if they want to be admitted as a private patient, often they will end up NOT getting treated for free. They will put up with a few inconveniences, secure in the knowledge that if they are really unwell, they are very likely to get excellent treatment in public hospitals anyway.

According to a report on the Canstar website of a Sky News interview:

“Leader of the Australian Greens Richard Di Natale told Sky News health insurance is a ‘waste of money’ for young people. ‘If you’re a young and healthy person, why on earth would you be contributing hard earned money to a policy that provides little to no benefit and really all it does is serve other people who are more frequent users of the system?’ he said. ‘You’re better off saving to buy a house.’”

Absolutely, Senator.

The 10% discount will entice a few 18 to 29 year olds back into the fold but it will be a trickle. They are too smart to fall for the Minister’s “big discount”.