Disclaimer: I'm not an expert, and this is what I've gathered to the best of my ability. I could be wrong in parts. I'm almost certainly missing some detail and have some terminology wrong.
If you end up in hospital for a procedure, you'll incur a number of costs. Insurance generally breaks these down into Hospital Expenses, and Medical Expenses. Hospital expenses are things like your bed on the ward, operating theatre fees, and administrative fees. Medical expenses are what your doctors charge - if it's an operation, that'll be your surgeon and the anaesthetist.
If you're a public patient at a public hospital, Medicare will pay for both of these. You shouldn't be out of pocket at all. But if you're a private patient at a public or private hospital, Medicare will only pay some. This is where private health insurance comes in. Private health insurance also means you'll likely get treated sooner and can choose your specialist. Of course if it's an emergency you can always go to a public hospital and get treated as a priority.
Most or all private health plans have basic hospital cover that will pay for the Hospital Expenses. Your level of cover (and various other things we'll get into) determines how much if any of the Medical Expenses will be covered.
For the remainder of this document, I'll only be talking about the Medical Expenses you incur when you undergo a procedure in a hospital - the bill from your specialists. These expenses are where the "but I thought I had private health insurance!?" shock usually occurs.
Medicare has a long list of fees called the Medicare Benefits Schedule (MBS). When you go to hospital, your specialists will bill you according to this list (and possibly for things not on the list - which means Medicare won't cover it at all). The list has item numbers and a dollar amount, and is updated periodically.
In hospital, Medicare will pay 75% of the MBS schedule fee for the item listed on your bill. Private health funds will pay at least the other 25%, as long as you're covered for that item under your policy.
But here's where it gets tricky.
The MBS schedule fee is just what Medicare thinks is an appropriate price for each item. It's not the same as what doctors think is an appropriate price. Usually it's a long way off.
The Australian Medical Association (AMA) has their own schedule of fees. To access it you have to pay or be a member, but I'm reliably informed the item fees are often several times higher than the MBS fees. For examples, an item that's $100 on the MBS schedule might be $400 on the AMA schedule. What the specialist actually charges you is somewhere in between. How much? You have to ask the doctor. Ideally before the procedure.
But the MBS schedule and the AMA schedule aren't the only ones. There are a whole bunch of other schedules used by various health funds. Some, like the Access Gap Cover (AGC) fee schedule are used by a whole lot of funds. Some are used by only one. For example, NIB has their own, called Medigap.
Just like the MBS represents what Medicare thinks is an appropriate fee, the health fund's fee schedule represents what they think is an appropriate fee. They're always at least the MBS rate, but usually a little bit higher. Generally, they're much closer to the MBS fee than the AMA fee.
Importantly, the rebate you get is based on the fee schedule used by the health fund.
Let's look at a practical example to hopefully make it clearer.
An anterior cruciate ligament (ACL) repair is item number 49542.
For the purposes of this example, we'll assume the procedure is covered, and we'll only use this item number - even though you'll also probably be charged by the surgeon for things like consultation, and by the anaesthetist for their part in the procedure.
At time of writing:
- the MBS schedule lists this item as $1,359.00.
- AGC lists it as $2,299.60.
- NIB's Medigap lists it as $2,087.55.
Medicare will cover 75% of the MBS fee - $1,019.25 The private health fund will pay the doctor the difference, but only up to the health fund's fee schedule amount
So a fund using AGC will happily pay the doctor an additional $1,280.35 ($2,299.60 - $1,019.25).
If the doctor's fee is higher than that (if they charge more than the health fund's schedule), you're liable for the rest. You're also liable for any excess the insurer charges.
So if the surgeon charges $2500 for the procedure and you have health cover with a fund using the AGC schedule:
- Medicare will pay $1,019.25
- Private health will pay $1,280.35
- You'll pay $200.40 (plus any excess)
Simple, right?
Funds can provide "gap cover" to help with that outstanding amount. These schemes can be "no gap" or "known gap" schemes.
In short, "no gap" means you won't be out of pocket at all, and "known gap" means you'll only have to pay up to a certain amount - usually $500. At least, that's what they're meant to mean.
Provided the specialist charges what the insurance company wants them to charge, this all works and is great for the consumer (and the insurer). But remember these fee schedules are generally way below what the AMA suggests doctors charge.
If the doctor charges more than the fund's fee schedule, the insurer will generally pay them less than they would have otherwise... which means you have to pay more. A cynical person might think of it as a way of punishing the doctor for not toeing the line, and punishing the patient for not choosing a compliant doctor.
Yeah, I know.
Back to our example.
Let's say your fund uses the AGC fee schedule and has a "no gap" scheme.
If the surgeon charges $2,299.60 for the procedure (the AGC fee amount), you'll have no out of pocket expenses (aside from excess). Medicare pays for $1,019.25 and your insurer pays $1,280.35.
But what if the surgeon charges, say, $2,300? 40 cents more?
Well now the fee has broken the health insurer's rules. So rather than paying the AGC fee rate, the insurer can just top up to the MBS rate.
So Medicare still pays for $1,019.25, but the insurer now only pays $339.75. You're up for the remaining $941.
So because of the "no gap" scheme, that extra 40c cost you almost $1000.
Known gap gives the specialist a bit more leeway. It works the same way, but the doctor can charge up to the known gap amount on top. So for a $500 "known gap" scheme, the surgeon could charge up to $2,799.60 and the fund will still pay up to their own scheduled fee. You'll have to pay that extra $500, but as we've seen, you and the doctor are still better off than if there was a "no gap" scheme.
Also worth keeping in mind is the "known gap" is per doctor. So a surgeon and an anaesthetist will both charge you up to that amount.
Insurers will also have "agreements" with certain doctors to comply with these gap rules. Essentially, these are specialists who will comply and charge less so you don't get stung. You'll need to check ahead of time though.
First, check your policy covers you at all for the actual procedure you're getting.
If it does, realise that the health fund is putting serious pressure on the specialist to lower their fees. Many specialists won't, so don't be surprised if your insurer only ends up covering a little bit.
Insurers also have different fee schedules. If the fee schedule has a lower amount (e.g. MBS < NIB < AGC < AMA), that means the doctor has to charge less to avoid you getting hit with a surprise bill.
There's also the gap scheme to consider. A "no gap" scheme is great if the doctor is willing to charge much less than they normally would, but can lead to a big bill if they don't. A "known gap" can let the doctor charge a bit more, but you'll have to pay the extra.
Again, I'm not an expert. This is information I've gathered from doing far too much investigation, and some of it was hard to find.
Choice has a great walkthrough of how gap cover works, and MyDr has a pretty good explanation of the entirety of the Australian Healthcare system if you want more.
Thanks for putting this together 👍