Australian private health insurers are warning that proposed changes to private hospital funding could lead to a reduction in private health insurance participation, at a time when premium increases and higher medical costs are already influencing consumer behaviour.
According to the Australian Financial Review’s (AFR) report, the federal government is consulting on a shift to a benchmark, or activity-based, pricing model for private hospitals, similar to the framework used in the public hospital system. Under the proposal, hospital payments would be linked to standardised prices and case volumes, instead of contracts negotiated directly between insurers and hospital operators.
Private Healthcare Australia (PHA) – whose members include Medibank, Bupa, and NIB – has modelled the potential impact and lodged its analysis with the Department of Health. The industry body estimates the change could add between $800 million and $1.2 billion a year to hospital costs and has raised concerns about the implications for premiums and participation. “At the middle of this range, around 560,000 people would likely drop their private health insurance, putting massive pressure on private hospital and health fund viability, while overwhelming the public health system. It is surprising the Australian government has not already done this modelling before allowing the proposition to proceed, as it is clearly impractical,” PHA director of policy and research Ben Harris wrote in the submission, as reported by AFR.
The department’s consultation material has not publicly set out a cost estimate for the proposed model. Separately, Health Minister Mark Butler has asked major funds to resubmit their premium proposals ahead of the April 1 rate change, with market analysts expecting average increases above 4%.
Insurers are reporting changes in product mix as members seek to limit costs. Industry survey data suggests more than 246,000 policies were downgraded in the six months to June 30, with policyholders moving from higher‑tier to lower‑tier products. In earlier periods, the number of upgrades had exceeded downgrades. Analysts link this trend to the resumption of more typical claiming patterns following COVID‑19 disruptions and the end of temporary cash rebates that funds returned to members when claims volumes fell during the pandemic.
Advisory firm DeltaPearl Partners has noted the potential for further shifts in membership profiles if pricing and product changes continue. “Private health insurance is at risk of a death spiral where increased out-of-pocket costs lead healthier and younger individuals to downgrade or drop coverage, leading to increased risk pools and higher premiums, leading to further individuals downgrading or dropping out. As individuals shift to lower levels of coverage, the burden and costs shift to the public system, waiting lists lengthen, and private health sector viability is threatened,” said DeltaPearl director Brad Rogers, as reported by AFR.
Around 15 million Australians currently hold private health cover, funding about 70% of elective surgeries. Over the past 16 years, premiums have doubled, while the price of health products and services has risen by roughly 20%, according to the Australian Medical Association. Comparison platform Canstar anticipates that more policyholders will continue to downgrade coverage rather than cancel policies. Director of data insights Sally Tindall has said that expected premium increases, particularly for gold‑tier products, are likely to encourage further downgrades. At the same time, she notes that the Medicare levy surcharge, averaging about $1,500 a year for many higher‑income earners without private cover, remains an incentive to retain at least a basic level of insurance.
The policy debate comes after the Australian Prudential Regulation Authority’s (APRA) 2024-25 private health insurance statistics, which provide insurer‑level data on financial position, premium income, claims, and key ratios. For the major funds, hospital products remain the primary source of premium revenue. Medibank reported total premium income of $7.65 billion, including $5.57 billion from hospital treatment and $2.08 billion from general treatment, with insurance claims of $6.55 billion. Bupa recorded premium revenue of $7.97 billion, comprising $5.98 billion from hospital and $1.99 billion from general treatment, and total claims of $6.56 billion.
HCF reported $4.12 billion in premium income, with $3.16 billion from hospital products and $962 million from general treatment, and claims of $3.62 billion. HBF generated $2.27 billion in premiums, including $1.65 billion from hospital and $621 million from general treatment, with $1.87 billion in claims. NIB reported premium revenue of $2.82 billion, including $1.99 billion from hospital and $829 million from general treatment, and $2.31 billion in claims. For smaller and regional funds, hospital cover similarly accounts for most premium revenue, with claims ratios varying according to product mix, membership demographics, and utilisation patterns. Some funds have offset higher claims through expense management or investment returns.
The APRA release comes as analysis points to a shift in the long‑term relationship between premium changes and health‑related inflation. Research from Money.com.au indicates that from 2005 to 2020, private health insurance premiums increased on average 1.1 percentage points faster than health inflation each year. Since 2021, premium adjustments have generally been below health CPI. According to that analysis, the gap between health inflation and premium growth peaked at about 2.6 percentage points in 2023 and is estimated to have narrowed to around 1.1 percentage points in 2025. This suggests current and upcoming premium decisions may be more closely aligned with underlying health cost trends than in the pre‑pandemic period. For insurers, this environment requires balancing regulatory assessments, member affordability, and rising claim costs, especially in hospital portfolios that drive most premium income.
Australia’s private health insurance sector is also operating within an international context of elevated medical cost growth. WTW’s 2026 Global Medical Trends report projects global health insurance costs to rise 10.3% in 2026, following estimated increases of 10% in 2025 and 9.5% in 2024. Asia‑Pacific is forecast to record an increase of 14%. For Australian health funds and hospital operators, these global trends, APRA’s local data, and the federal government’s funding review are collectively shaping decisions on pricing, product design, and risk management as the sector looks to sustain participation and service access.
