New modelling shows unless the government increases the private health insurance rebate or at least freezes it – we are headed for big trouble.
A new report launched today shows more than 200,000 Australians have downgraded their private health insurance from gold packages to cheaper silver and bronze packages with higher out-of-pocket costs and lower coverage levels.
Commissioned by medical indemnity provider Avant Mutual, and produced by DeltaPearl Partners, the report – Protecting Australia’s Dual Healthcare System – found that this “tier slide” triggered a domino effect, shifting costs to the state hospital systems, and placing significant pressure on private hospitals and increasing wait lists.
The federal government’s private health insurance rebate, according to the report, represents “exceptional value” for taxpayers, saving up to $1.25 in public hospital costs for every dollar spent.
The bad news is, the real value of the PHI rebate has not kept pace with medical inflation, said the report.
“In 2014 the Australian government introduced the rebate adjustment factor (RAF) which has had the effect of structurally eroding the rebate’s value to each eligible PHI policyholder,” it said.
“Since 2013, the rebate rate paid to individuals has cumulatively declined by approximately 19%, thus increasing the effective cost of health insurance premiums for policyholders.
“The RAF mechanism means that during periods of high medical and regular inflation – precisely when healthcare costs are rising fastest – consumers simultaneously face the largest increases in their out-of-pocket insurance costs.”
That has been the driver of the increased rates of “tier slide” as people – particularly the younger, healthier cohorts so crucial to balancing the risk pool – seek to reduce their monthly premium costs.
“The result is a concerning cycle where: reduced health coverage leads to lower demand for private services; private hospitals become financially unviable and close facilities; remaining private options become more expensive due to reduced economies of scale; and, more consumers drop or downgrade coverage, thereby reducing the insurance pool,” said the report.
“This tier slide threatens to reintroduce the classic insurance ‘death spiral’ where rising costs drive away low-risk participants, further increasing average care costs and driving away the next tier of participants until the system becomes unsustainable.”
Professor Steve Robson, former AMA president and now Avant’s chief medical officer said the PHI rebate was “one of the most effective health investments the government makes”.
“Its erosion through inflation has left Australians downgrading their cover, putting pressure on private hospitals and driving up the public hospital waiting lists,” he said.
“We want to highlight interdependence of public and private sectors and challenge the overly simplistic arguments about the relationships between private hospitals and insurers.
“Instead of engaging in the recent conflict in private healthcare debates, we want to focus on the bigger picture that includes the value of the rebate, the appeal of private health insurance, structural challenges in the sector and most importantly the perspective of patients who want accessible, affordable, and high-quality care.
“We look forward to working with the government and all stakeholders to ensure that all Australians can continue to have affordable, safe, just access to the healthcare services they need.”
Since 2018, at least 18 private maternity units have closed across Australia. The report said “expert predictions [claim] private maternity services may be extinct by 2030 without policy intervention”.
Similar closures are emerging in psychiatric care despite rapidly increasing demand for mental health services.
Private hospital closures create immediate pressure on public hospitals, said the report. For example:
- The Darwin Private Hospital closure of maternity services in June 2025 is expected to increase Royal Darwin Hospital’s maternity load by 13%;
- Regional areas are particularly affected by this trend, with some jurisdictions such as the Northern Territory and parts of Tasmania losing all private maternity options;
- Public hospital waiting lists are worsening, with some procedures exceeding recommended waiting times by over 300%.
The report authors said it was clear the PHI rebate was crucial to maintaining stability across Australia’s two-armed healthcare system.
“Without the existence of the PHI rebate an additional $74.3 billion in healthcare costs would be transferred to the public system over a decade,” they wrote.
“Any reduction in the annual value of the PHI rebate would cost the Australian government more than it saves – and that loss would be borne mostly by the states and territories.
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“Our modelling shows that increasing the value of the rebate would further enhance system-wide benefits.”
DeltaPearl Partners modelled four scenarios over a 10-year projection period:
- Scenario 1: complete removal of the PHI rebate, staggered over a five-year period;
- Scenario 2: partial removal of the PHI rebate (for example, to fund a public dental scheme);
- Scenario 3: freezing PHI rebate rates at their current levels;
- Scenario 4: return PHI rebate rates to their levels before the introduction of the rate adjustment factor.
“Full rebate removal would see over 8 million individuals either downgrading or dropping out of PHI, resulting in approximately 14.3 million fewer episodes treated privately and an estimated $74.3 billion in reduced private medical expenditure,” the report found.
“While the government would save approximately $43.6 billion on rebate expenditure, the need to replace this private spending would create a net negative fiscal position of $30.7 billion.”
Partial removal of the PHI would result in 3.7 million people downgrading their PHI or dropping out entirely leading to an estimated $33.7 billion in reduced private medical expenditure, and a net fiscal loss of $11.1 billion.
Freezing PHI rates at their current levels would see over one million Australians upgrading or retaining their PHI, leading to an estimated $6.7 billion in increased private medical expenditure, and a positive fiscal position of $1.6 billion.
Reinstating rebate rates would see over three million Australians upgrading or retaining their PHI coverage, producing $24.2 billion in increased private medical expenditure, and a positive fiscal position of $4.6 billion.
“The PHI rebate is not a luxury government expense but a fundamental investment in system sustainability, one that saves taxpayers substantially,” the report concluded.
“Strengthening the PHI rebate represents the most cost-effective approach to Australia’s healthcare system sustainability.
“Conversely, allowing continued rebate erosion risks triggering an irreversible decline in the viability of Australia’s private health insurance system; this will, in turn, lessen service provision at private hospitals and overwhelm public hospitals and ultimately cost taxpayers far more than the cost of maintaining or increasing PHI rebate levels.
“Immediate policy action is required to reverse PHI rebate decline, to arrest the tier slide phenomenon and to preserve the private sector healthcare capacity that has made Australia’s healthcare system internationally acclaimed for both equity and efficiency.
“The choice seems clear: invest in maintaining the dual system or face the exponentially higher costs of managing its collapse.”