Illustration: Simon Letch Once you've had private health insurance continuously for a decade, the loading is dropped, and you'll pay the same premiums as a 30-year-old. Don't be fooled. The private health insurance industry needs younger members, who are less likely to go to hospital, to subsidise older members. Most people don't use the hospital system much until they're at least in their 50s. The Australian Hospital Statistics suggest hospital admissions are fairly steady for under-55 year-olds and then start rising rapidly.

The main reason young people go to hospital is because they've been in an accident. Credit:Glenn Hunt Women use it more than men until their mid 40s, because of pregnancy and childbirth. Even so, a 70-year-old woman is roughly twice as likely to wind up in hospital as a woman in her 20s, 30s, or 40s. The main reason young people go to hospital is because they have been in an accident. If this happens to you, you may not get much benefit from your private health insurance since the ambulance will nearly always take you to a public hospital. You might be better off with private health insurance because you have complex health needs. Or because you're a high-income earner and you'll be whacked with higher tax in the form of the Medicare Levy Surcharge if you don't. But that's a separate calculation to the LHC loading.

The fact is most 30-year-olds are financially better off not buying private health insurance even if it means paying more down the track. The arithmetic is straightforward. Take an average premium of $1200 a year for a single person with basic hospital cover and excess of $250. If you pay $1200 a year from age 30 to 40, you've forked out $12,000. If instead you stay in the public system until age 40 and then take up private health insurance, the 20 per cent loading means you'll cough up $1440 a year. After another decade, the person who took private health insurance at age 30 would have paid a total of $24,000, while the person who took it at age 40 would have paid just $14,400. The person who buys private health insurance at age 30 and keeps it would pay the princely sum of $54,000 by age 75. But if you bought it for the first time at 65, despite a 70 per cent loading on your premiums, you'd only pay $20,400 by age 75.

Of course, the premiums don't stay static. Private health insurance companies have lifted premiums by a cumulative 72 per cent over the past decade – almost three times the inflation rate – but these price hikes apply to everyone regardless of what age they first joined. The difference is even bigger when you consider a concept called the "time value of money". This is a fancy way of saying that money now is worth more than money in the future, because you can do other things with it such as invest it, or buy a house. So what would happen if you invested the money instead of spending it on private health insurance? If you took $1200 at age 30 and added $1200 each year, it would be worth a huge amount because of compound interest. If your money earned 10 per cent a year, the stockmarket average for the past three decades, it would be worth $950,154 after 45 years. A more modest 5 per cent rate would yield $202,422. The LHC loading was introduced by the Howard government in 2000 with the goal of boosting the number of younger people in private health insurance. It worked. There's a simple reason: humans are psychologically primed to avoid loss.

Experiments show if you give a capuchin monkey a piece of apple, the monkey is happy. But if you give the monkey two pieces of apple, and then take one away, the monkey is unhappy. Humans are no different. Economists know that a stick is generally a more effective policy lever than a carrot. People didn't really care about the tax rebate for private health insurance because it would still be there next year, but they did care about the idea of losing something. Recently, I was sent survey results that suggest most people who delay the purchase of private health insurance end up regretting the fact they didn't do it sooner. More than two out of three Australians who now pay the LHC loading wish they had bought private health insurance earlier, according to a survey of 1200 people done for comparison service CompareTheMarket. I understand that regret, having recently bought private health insurance for the first time last month.

My husband and I, who are both 40, are now paying premiums 20 per cent higher than if we had held insurance continuously since we were 30. It irks me that the years we spent in San Francisco where we had private health insurance don't count, because we didn't get private health insurance in Australia within a year of our return. But while my instinct is to kick myself for not doing it sooner, I should actually be congratulating myself. We're better off. Ross Gittins is on assignment. Caitlin Fitzsimmons is editor of Money. Find her on Facebook or Twitter.