Private health premiums are rising, but is the system working? (spoiler: no)

Private health insurance premiums rose by 4.4% on April 1 – faster than inflation, and at a time when many households are already under pressure.

This increase directly mirrors the 4.4% rise in the ‘medical hospital services’ CPI-category reported by the ABS. The rise is unsurprising given that our healthcare system prioritises expensive, acute, interventions over prevention and primary care.

Private health insurance affects all Australians

Private health insurance plays a big part in Australian healthcare. About 45% of Australians have private health insurance that includes hospital cover. But it affects all Australians – not just those who have it – for two main reasons.

Firstly, the private health insurance rebate (a Howard-era policy) means that premiums are subsidised by taxpayers. The total cost of the rebate is about $12 billion a year – more than what Western Australia spends on public hospitals, and about a third of what the Commonwealth spends on Medicare.

The rebate itself was worth $7.5 billion in 2024-25 (Table 6.8.1) – almost a quarter of health funds’ combined revenue of $31 billion. But the cost of this policy also includes the direct revenue foregone through the rebate ($1.5 billion in 2024-25 Table A.1) and exemptions from the Medicare Levy Surcharge – estimated at $2.5 billion in 2015-16.

Secondly, private health insurance is a fundamental component of private health care, which forms a significant part of the broader health system.

The health funds paid out $24.4 billion in benefits in 2023-24, which was 9% of what the country spent on health services that year. Private health insurance is the largest contributor to total private hospital spending, and of the 2.6 million elective (non-emergency) procedures performed each year, 67% happen in private hospitals.

Does the private sector take pressure off public hospitals?

The private health insurance rebate was sold on the premise that higher uptake would relieve pressure on the public system. The idea has become something of an article of faith.

The problem is that the evidence for this claim is weak at best and, in some cases, points in the opposite direction.

A team of researchers at the University of Melbourne found that the effect of private health on public waiting lists was negligible because the increases in private patient volume were offset by commensurate reductions in public patient volume.

That is because highly specialised clinicians — particularly surgeons and anaesthetists — are in limited supply. The time they spend in the private sector is time they do not spend in the public system. There are only so many specialists so, rather than expand total capacity, private health insurance simply reallocates scarce resources. It is a zero-sum game.

So, why not simply train more specialists? For one, training numbers are largely controlled by specialist colleges, which can constrain supply in ways that are not always aligned with system needs.

In fact, the private sector may increase pressure on public hospitals because a higher proportion of clinical activity in the private sector is inappropriate and even unnecessary. Examples include CT scans, lumbar spine surgeries, and coronary angiograms – and current policy settings limit the health funds’ ability to do much about this (more on that in Part 2).

This means that scarce financial and human capital are tied up doing what amounts to medical busywork, instead of providing care to patients with real health need. Claims that the private sector “saves” public money ignore these realities.

Private health is incompatible with universal access

Private health insurance coverage skews in favour of the wealthy. This means we have two-tier healthcare system where access is determined by a person’s ability to pay.

Little wonder that just 32% of Australians feel confident that they can afford care, while half report that they missed out on healthcare in the past year. The wealthy go to the front of the queue while those who can’t afford private health languish on public waiting lists.

This is difficult to square with any notions of equal access for equal need – a principle espoused by the Australian government and the Australian Medical Association.

It is not what we were told would happen.

It does not have to be like this

We have arrived here by choice. The health funds are the result of this choice – not the cause. They exist because of how the health system – and its incentives – have been designed.

While the funds cannot do much about the medical busywork problem, they do have a financial and political incentive to keep members healthy and out of hospital.

This creates an opportunity to rethink how private health insurance operates within the system.

Part 2 explores this opportunity and outline some reforms that can help us get better value out of private health.