‘No gap’ private health insurance can save you money. But there’s a catch

During a cost-of-living crisis, many Australians may be wondering if their private health insurance policy actually delivers.

Rising premiums, the high costs of specialists’ fees, large out-of-pocket costs and bill shock are some common concerns.

So it might be tempting to look for a “no gap” and “known gap” arrangement. These are in the news this week due to concerns about how health insurer Bupa is negotiating with hospitals to provide this type of care.

But when it comes to hospital care more broadly, what do the terms “no gap” and “known gap” really mean? And how do these options affect your choice of doctor?

Out-of-pocket costs are high

Australians spent A$44 billion out-of-pocket on health in 2023-24. Per person, that’s $1,636 a year.

But averages mask the real problem. Costs are concentrated among people who use the private system, where a single hospital admission with multiple specialists can easily generate thousands of dollars in gap payments, many unexpected.

Examples include a bill from:

-- an anaesthetist who charges well above the Medicare schedule fee (patients rarely choose their own anaesthetist so this bill often comes as a surprise)

-- a surgical assistant whose fees the insurer does not cover

-- consulting specialists seen during an admission who charge more than the Medicare rebate and do not participate in your insurer’s “no gap” arrangement.

The underlying problem is specialist fees in Australia are unregulated. This means doctors can charge what they like.

No wonder privately insured Australians are looking at cheaper, or more predictable, options.

What is a ‘no gap’ arrangement?

“No gap” means you pay nothing out-of-pocket for your doctor’s fees. But that’s only if your doctor has agreed to participate in your insurer’s scheme.

Here’s how it works. Usually, for private patients (in private hospitals or as private patients in public hospitals), Medicare pays 75% of the Medicare schedule fee (the fee the Australian government sets for providing certain services). Your insurer covers the remaining 25%. If your doctor charges above that combined amount, you pay the difference.

Sometimes patients pay for their hospital admission first, then their private health insurer reimburses them later.

Under a “no gap” arrangement, your insurer pays participating doctors an agreed rate in exchange for them charging patients nothing extra.

This means no surprise bills for that service. For a planned procedure with a surgeon you can choose in advance, this matters.

But you’re limited to doctors in your insurer’s preferred network. If your preferred surgeon isn’t in the scheme – or the anaesthetist assigned on the day isn’t – you’re back to paying out-of-pocket.

“No gap” also only covers doctors’ fees. Hospital room charges, theatre fees and prostheses may still generate gap fees depending on your plan.

There is also an important distinction for outpatient care – the specialist consultation you have before or after a procedure, in the specialist’s private rooms.

Private insurers are legally prevented from covering these visits. For outpatient consultations, Medicare pays 85% of the schedule fee. If your specialist charges above the schedule fee – which most do – you pay the full gap out-of-pocket, with no insurance coverage at all. That can easily run to a few hundred dollars per visit, and adds up quickly if you need ongoing specialist care.

What is a ‘known gap’ arrangement?

“Known gap” is a middle ground. The doctor charges above the schedule fee, but the insurer caps how much you pay – typically up to $500 per service – and you’re told the amount before the procedure.

More doctors participate under “known gap” than “no gap” schemes because they can still charge above the schedule fee. That means more choice for consumers, who also know what they’ll pay upfront.

But when multiple specialists are involved – surgeon, anaesthetist, assistant – those capped gaps add up. Having a “known gap” arrangement reduces the surprise, but it doesn’t eliminate the cost.

What’s in it for insurers?

Insurers have a clear financial interest in such arrangements. By negotiating agreed rates with doctors, insurers limit their liability and have predictable costs.

Large insurers – those with millions of members – have real bargaining power. Doctors who want access to their patients have an incentive to join the scheme, even at rates below what they’d otherwise charge.

This shifts pricing power from individual specialists toward large insurers. For patients of participating doctors, that can mean lower costs.

But it also means insurers have growing influence over which doctors patients can see without a financial penalty.

Is it like US health care?

The United States has “managed care”, which has been the dominant model of health care for decades. This is where insurers build networks of preferred providers and financially penalise patients for going outside them.

But Australia’s system is different. We have universal health-care coverage through Medicare, and private health insurance sits alongside it.

With Australia’s “no gap” or “known gap” schemes, you can still see any specialist doctor using your private health insurance, but you may pay more for ones outside your insurance company’s network.

What else would work to fix specialists’ fees?

Ultimately “no gap” and “known gap” schemes are a private-sector response to a problem – reducing out-of-pocket health-care costs – that ultimately requires a public policy fix.

A better approach would be for the government to set a fair Medicare schedule fee, updated annually, and tie rebates to specialists who charge at or near that fee. Specialists who charge well above it should not receive the same taxpayer subsidy (Medicare rebate) as those who charge reasonably.

This would address the root cause. “No gap” and “known gap” schemes may be useful. But they are a workaround to reduce out-of-pocket health-care costs – not a solution.

Yuting Zhang has received funding from the Australian Research Council, Department of Veterans' Affairs, the Victorian Department of Health, National Health and Medical Research Council, and Eastern Melbourne Primary Health Network. In the past, Professor Zhang has received funding from several US institutes including the US National Institutes of Health, Commonwealth fund, Agency for Healthcare Research and Quality, and Robert Wood Johnson Foundation.