For many Australians, private health insurance is a safety net—whether it’s for starting a family, preparing for retirement, or simply having peace of mind. But there’s another motivator behind taking out cover: avoiding the Medicare Levy Surcharge (MLS).
The MLS is a tax penalty aimed at higher-income earners who don’t hold private hospital cover. At first glance, a Basic hospital policy can look like an easy way to sidestep the surcharge. But is it really the smartest option, or could it cost you more in the long run?
What Exactly Is the Medicare Levy Surcharge?
The MLS applies to Australians who earn above certain income thresholds and don’t have private hospital insurance. Its purpose is to encourage wealthier individuals to contribute to the private system and ease the load on public hospitals.
For the 2025–26 financial year:
- Singles earning more than $101,000 pay the surcharge.
- Couples and families with a combined income above $202,000 are also liable.
The surcharge ranges between 1% and 1.5% of your income, depending on your earnings tier. That can add up to thousands of dollars at tax time, making private cover look like a worthwhile investment. But there’s more to the story.
Why Basic Cover Falls Short
While Basic hospital insurance technically exempts you from the MLS, it’s far from comprehensive. Many Australians assume they’re “covered” only to find out the hard way that their policy offers little real protection.
Here are the main drawbacks:
- Minimal coverage
Most Basic policies only include ambulance services and a handful of restricted hospital treatments. Common procedures like hernia operations, tonsil removal, or maternity care are usually excluded, leaving you to foot the bill if you need them. - Ambulance duplication
In some states, such as Queensland and Tasmania, ambulance services are already funded by the government. Paying for a policy that mainly covers ambulance costs offers little to no value. - Poor value for money
The difference in cost between a Basic policy and a slightly higher tier is often small. For just a few extra dollars each month, you could move up to a Basic-plus or Bronze plan, which covers far more services and offers genuine protection.
Common Pitfalls of Basic Policies
Many people buy Basic cover solely to avoid penalties like the MLS or the Lifetime Health Cover (LHC) loading, without fully understanding the limitations. Three big issues stand out:
- Restricted hospital benefits: Major procedures such as joint replacements, cardiac surgery, and pregnancy-related care are rarely included.
- High excess trade-offs: Choosing a higher excess to keep premiums low might save you in the short term, but it means hefty out-of-pocket expenses when you actually need hospital treatment.
- Policy confusion: The “plus” options (like Basic-plus) complicate comparisons. Some insurers add extra services to lower-tier products, making it essential to read the fine print before signing up.
Avoiding More Than Just the MLS: The LHC Loading
Another factor to consider is the Lifetime Health Cover loading. If you don’t have hospital insurance by the age of 31, your premiums will increase by 2% for every year you delay, up to a maximum of 70%. For example, if you first take out cover at age 40, you’ll pay 20% more on your premiums for at least a decade.
This is why many younger Australians take out a policy early—sometimes even a Basic one—just to avoid the LHC loading later on. But again, a slightly higher-tier policy can provide much better value for not much more money.
So, Is It Worth Paying a Bit More?
If your only goal is to avoid the Medicare Levy Surcharge, a Basic policy will do the job. But in practice, it may leave you exposed to steep medical bills if you need hospital treatment.
By spending a little extra each month on a Bronze or Basic-plus policy, you can enjoy far broader coverage while still protecting yourself from both the MLS and the LHC loading. Over the long term, the added protection is usually worth the modest bump in premiums.
Final Word
Basic health insurance might look like a cheap way out of the Medicare Levy Surcharge, but it often provides little real benefit. If you’re going to invest in private health cover, it’s worth considering a policy that balances affordability with genuine protection. That way, you’ll avoid tax penalties and have peace of mind knowing you’re actually covered when you need it most.
