A new consumer survey has fuelled further debate over how Australia funds private hospital care, as insurers warn that the federal government’s proposed activity-based funding (ABF) model could affect participation, pricing, and product design across the private health sector.
Research commissioned by comparison site Money.com.au found that 80% of Australians with private health insurance support reform of private hospital funding. More than half of respondents (53%) said they would favour any model that lowers patient out-of-pocket costs, while 27% specifically backed the Commonwealth’s draft ABF framework, which would pay private hospitals a standardised price based on the type and volume of care delivered. One in five (20%) indicated that the current mix of insurer contracts, patient charges, and Medicare benefits should remain in place.
Money.com.au’s general manager of health insurance, Chris Whitelaw, said policyholders are focused on affordability as they assess funding options. “Australians want sustainable funding for private hospital care, but they expect any new funding model to make healthcare more affordable, or at the very least not increase costs for patients. People don’t want reforms that shift Australia closer to a US-style system where private hospital patients pay excessive gap fees,” Whitelaw said. He also pointed to potential cost-transfer risks if funding arrangements change. “Most private hospitals are for-profit enterprises, so reform has to balance commercial reality with patient outcomes. If price caps are introduced under an activity-based model, there’s a real risk private hospitals simply recoup costs through higher gap fees or charges elsewhere,” he said. Money.com.au’s analysis suggests industry-average premium increases this year are likely to be around 4%, highlighting affordability concerns for both consumers and insurers.
Under the federal government’s draft proposal, private hospitals would move toward an activity-based funding approach similar to that used in public hospitals. A central element is the proposed Private National Efficient Price (PNEP), used as a benchmark to inform pricing and contract negotiations between private hospital operators and private health insurers. Rather than relying solely on bilateral contracts that bundle pricing and service terms, the ABF model would link payments to a standard schedule of prices for defined treatments and case types. The framework remains in draft form, with consultation underway and any changes proposed to take effect from July 2026. For insurers, the shift raises questions about how a benchmark price would interact with existing contracting strategies, network arrangements, and different pricing structures across facilities and regions. Hospital operators face uncertainty about how a national efficient price may influence revenue, cost recovery, and capital planning.
Money.com.au’s research indicates that support for reform varies across age groups. Gen X respondents were the most likely to endorse the government’s ABF proposal, with 27% backing that specific model. Baby Boomers were the strongest supporters of reform in general terms, with 64% saying they would support any funding structure that reduces gap fees. Younger respondents were more inclined to maintain current settings. Among Gen Z, 46% favoured retaining the existing funding system, while 34% of millennials also supported the status quo. For insurers and policymakers, these differences may shape communication approaches and expectations about how changes to products and networks will be received across demographic segments.
While the survey points to broad support for change among policyholders, insurers and industry bodies are warning that the proposed ABF framework may increase hospital costs and reduce private health insurance participation. Private Healthcare Australia (PHA) – whose membership includes Medibank, Bupa, and NIB – has lodged modelling with the Department of Health estimating that the shift to a benchmark or activity-based pricing regime could add between $800 million and $1.2 billion a year to hospital costs. PHA has linked this to potential upward pressure on premiums and a reduction in membership.
“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 the Australian Financial Review. Consultation material released so far has not included a public cost estimate for the new model. Separately, Health Minister Mark Butler has asked major funds to resubmit premium applications ahead of the April 1 rate round, with analysts expecting average increases above 4%.
Affordability pressures are visible in recent changes to product mix. Industry data indicate that more than 246,000 policies were downgraded in the six months to June 30, with members moving from higher-tier to lower-tier cover. In earlier periods, policy upgrades had exceeded downgrades. Analysts attribute this shift partly to the normalisation of claims following COVID-19 disruptions and the end of temporary cash-back programs, when funds returned savings from lower claims volumes to members. With claiming patterns now closer to pre-pandemic levels and premiums rising, households appear increasingly focused on limiting ongoing costs while retaining some level of hospital cover.
Advisory firm DeltaPearl Partners has outlined the potential implications if this pattern persists. “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,” DeltaPearl director Brad Rogers said, as reported by AFR.
Around 15 million Australians currently hold private health insurance, which funds about 70% of elective surgeries. Over the past 16 years, average premiums have roughly doubled, while the cost of health products and services has risen by around 20%, according to the Australian Medical Association. Comparison service Canstar expects that more members will opt to downgrade to cheaper tiers rather than cancel policies altogether. Director of data insights Sally Tindall has pointed to expected premium increases, particularly for gold-tier cover, as a driver of further downgrades. The Medicare levy surcharge – which averages about $1,500 a year for many higher-income earners without private cover – remains an incentive to maintain at least basic hospital cover.
The discussion about funding reform and participation is occurring alongside new data from the Australian Prudential Regulation Authority (APRA) on insurer performance. APRA’s 2024–25 private health insurance statistics show that hospital products remain the main source of premium income and claims across the sector. Among larger funds, Medibank reported premium income of $7.65 billion, including $5.57 billion from hospital treatment and $2.08 billion from general treatment, with $6.55 billion in claims. Bupa recorded $7.97 billion in premium revenue, with $5.98 billion from hospital products and $1.99 billion from general treatment, and $6.56 billion in claims.
HCF reported $4.12 billion in premiums, comprising $3.16 billion from hospital and $962 million from general treatment, with $3.62 billion in claims. HBF generated $2.27 billion in premiums, of which $1.65 billion came from hospital cover and $621 million from general treatment, with $1.87 billion paid in claims. NIB recorded $2.82 billion in premium revenue, including $1.99 billion from hospital products and $829 million from general treatment, and $2.31 billion in claims. Smaller and regional funds show similar reliance on hospital portfolios, with variation in claims ratios reflecting benefit design, member demographics, and utilisation patterns. Some funds have offset higher claims through expense controls or investment returns.
Money.com.au’s premium research suggests that recent rate movements have tracked more closely with health-related inflation than in the pre-pandemic period. Between 2005 and 2020, private health insurance premiums rose on average 1.1 percentage points a year faster than health inflation. Since 2021, premium changes have generally been below health consumer price inflation, with the gap between health inflation and premium growth peaking at about 2.6 percentage points in 2023 and estimated to have narrowed to around 1.1 percentage points by 2025.
For insurers and policymakers, the combination of consumer support for changes to hospital funding, insurer concerns about participation, and a closer alignment between premiums and underlying health costs forms the backdrop to the next phase of consultation. Any move to an ABF model with a national benchmark price will need to be considered alongside hospital cost structures, APRA’s prudential settings, and member affordability, at a time when downgrades, rather than upgrades, are a prominent feature of portfolio dynamics.
