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Tax deducibility for health insurance premiums?

Financial adviser Kevin Smee has suggested it's time to rethink health insurance, including making premium tax deductible again to help take the pressure off the public system.

Monday, March 25th 2024, 9:20AM 7 Comments

by Jenny Ruth

“We all know that our existing healthcare system has broken parts. Mostly because of our population size, tax take, geographic stretch etc.,” Smee wrote on LinkedIn.

“So, for those that can afford the premiums, and therefore take the pressure of the public system, how about making the premium tax deductible?” he asked.

“We can claim donations, income protection and interest on property investment so why not private medical insurance.”

But insurance agents don't think it's likely the current government would even consider making premiums tax deductible.

Graeme Lindsay of industry research organisation Strategy Financial says lobbying for tax deductibility would be “like shovelling water uphill with a pitch fork.”

The main reason why the cause is hopeless is because it would take many years before the private sector it was of sufficient size to relieve the pressure on the public system, he says.

But the government would suffer an immediate drain on its tax take at a time when it's short of cash and trying to reduce the “profligate over-spending” of the previous government, Lindsay says.

Willowgrove Consulting's Jon-Paul Hale says: “We have to be careful what we wish for.”

He notes that about 25% of New Zealand's population already has health insurance and giving them a tax break would immediately reduce government revenue, adding to the public health system's funding shortfall without impacting demand.

“We know from past tax deductibility that the impact is limited as people without means wouldn't take up medical insurance because of the tax break,” Hale says.

And while some middle income people might take on health insurance with a tax incentive, it's likely to be only a single-digit percentage of the population, he says.

How to treat businesses which offer employees health insurance would also be a complicated and thorny issue – businesses currently can deduct the costs of a group scheme but pay fringe benefits tax on the benefit provided, or they can make it part of a salary package and deduct tax at the employee's marginal tax rate.

“The bulk of medical insurance when it was last tax deductible was in employer group schemes and this meant that corporates benefited the most.”

Tags: insurance

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Comments from our readers

On 25 March 2024 at 2:31 pm JPHale said:
In principal I support tax deductibility for people when it comes to medical insurance.

At the same time, when thinking though the implications of adding deductibility, I have my doubts that it would deliver to the intended people as meaningful cost savings or incentive to take up cover for many of the reasons mentioned above.
On 25 March 2024 at 5:11 pm KeepThingsSimple said:
At the moment, c. 50% of elective procedures are funded through health insurance. Treasury has likely performed the calculations and come to the view that the increase in the penetration rate of health insurance is unlikely to offset the costs of providing tax relief to existing customers who already hold private health insurance without the relief. Put another way, Treasury probably takes the view that an additional $1 of funding into the public system delivers more service than $1 of tax relief into the private system.

Of course, the trouble with this line of thinking is that it does nothing to address the fundamental issue with the health system: the shortage of supply. I’d like to see some new thinking from policymakers on solutions to increase the supply of health talent and facilities.
On 25 March 2024 at 5:51 pm JPHale said:
KTS, agree, the issue isn't just money, it is the delivery apsect as well.

There is potential for public/private partnership here, this is where Aussie has gone with their system. Though the risk is anything the government touches will remove efficency and likely increase private costs too... Which seems to be part of what Aussie is dealing with, though with a much larger budget to work with.
On 28 March 2024 at 9:40 am Lifer said:
A potentially more palatable approach for the current government might be to take FBT off employer subsidized health and life insurance. This would increase the uptake of health and life insurance addressing the underinsurance issue, build better financial resilience into the NZ economy, help relieve pressure on the public health system, improve productivity and ensure more people had access to health care and a financial safety net. At the current rate, FBT makes it prohibitive for employers to offer such benefits.
On 28 March 2024 at 11:00 am Majella said:
@Lifer

Yes, indeed. When we approached then Health Minister Woodhouse in 2014, he almost laughed before telling us that 'the government is not considering FBT reform or relief.'
On 28 March 2024 at 5:02 pm KeepThingsSimple said:
Unfortunately, the same fiscal argument applies on FBT as tax incentives - i.e. the increase in the take-up of health insurance is unlikely to compensate Treasury for the loss of FBT already being collected.
On 28 March 2024 at 10:56 pm onion said:
Better than tax deductions on insurance would be tax rebates for the cost of procedures that remove load on the public system.

How they are paid, either from savings or from insurance, does not discriminate against self-insurers.

The ultimate aim should be to relieve the pressure on the public health system, not to subsidise insurers.

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