10.5 million Australians who currently hold private health insurance could abandon the sector, and move back onto the public health system, thanks to proposed changes to private health insurance laws.

Ramsay Health Care (ASX: RHC) boss Chris Rex has slammed the federal government over the changes, warning that increasing prices could force many to cancel their health insurance. Mr Rex has told the Australian Financial Review that “If private care becomes unaffordable, their healthcare cost does not disappear, it just transfers back to the public system and is paid by taxpayers.

Last week, the government announced that the tax rebate for health insurance premiums will be indexed to the Consumer Price Index (CPI) – otherwise known as the inflation rate. This follows changes that began from July 1, where the 30% tax rebate will be progressively scaled back for those on higher incomes.

The move was expected to save the government nearly $700 million, but may backfire, as consumers move into the public health system, costing taxpayers more. If you’re single and earning more than $84,000, or a couple with a combined income of more than $168,000, your premiums will increase. That could mean a price hike of up to $1,300 on a typical $4,000 annual family policy. The Australian Taxation Office (ATO) has a handy table, if you want to know how you will be affected.

Of course, if you do decide to leave the private sector, the ATO will slug you with the Medicare levy surcharge, which can be up to 1.5% of your taxable income.

The risk of people leaving the system may be why private health insurer, NIB Holdings (ASX: NHF) has today agreed to buy Tower Ltd’s (ASX: TWR) New Zealand health insurance business for around $80 million. NIB have said that the New Zealand market was attractive as there “was almost no regulation in the market.” The company also said that budget constraints in New Zealand mean the government knows there must be more future private funding of healthcare.

Foolish takeaway

Past experience has shown that the attractiveness of private health cover can impact the numbers that take up this insurance. Will it be different this time? Unlikely.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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