Is private health insurance too complicated?

Private Health Insurance (PHI) premiums increased on 1 April. Every time this happens, consumers are often advised to shop around.

But is this just putting responsibility on individuals to understand an incomprehensible system with thousands of different plans? Can an everyday consumer find one that is right for them, or will they pay the consequences if they make the wrong choice? 

This is not to suggest that PHI isn’t important, as our recent PHI report showed, seniors value what PHI can offer, both in peace of mind and control. But can anyone realistically make a comparison and end up on the best deal under the system we currently have? 

How complicated is the Private Health Insurance system?  

Let’s start with prices.

The recent increase in prices for PHI, which occurs every year on 1 April (April Fool’s Day!) gives us insight into the complexity of PHI.

While the average increase across the whole sector is 4.41% (the highest since 2017), there is a wide range of variation between funds and between product tiers.  

On average, premiums increased more among for-profit funds compared to not-for-profit funds in 2026.

However, this average does not reflect the actual prices people see. This is because it takes the average across all the different types of plans: Basic, Bronze, Silver, and Gold.

The largest PHI insurer in Australia is Medibank, with 26.5% of the market. Its average increase in 2026 is 5.10%. But none of its individual plans are increasing by this amount: the lowest increase is Medibank’s Silver Plus Core plan, increasing by 1.89%; the highest is the Gold Protect increasing by 9.93%. Though this also varies by state, extras, discounts, and rebate applicable. 

This is a trend seen across insurers; the plans with the highest level of cover increase the most, but the average is brought down by smaller price increase – or, in some years, price decreases – among the plans with lower levels of coverage. 

Interestingly, there has been a trend in recent years of a declining number of insurers offering the highest-level Gold plans. Some insurers now only offer up to Silver! 

The price of coverage is certainly one consideration but should be in the context of the amount and quality of the coverage. 

Enter the Commonwealth Ombudsman 

A recently released report by the Commonwealth Ombudsman found there is wide variation in the proportion of premiums paid out in benefits and the amount spent on management expenses.

For insurers with open membership (some funds are restricted to certain professions), the total benefits paid as a proportion of contributions made ranged from 75.4% (bad) to 90.4% (good, but not great). Put another way, that means for every dollar you pay, you get back between 75.4c and 90.4c in benefits on average in these funds. 

Another interesting indicator is the proportion of income that a fund spends on “management expenses”, which ranged from as low as 7.6% up to 22.8% for open membership funds (not including one outlier fund with exceedingly high management expenses). So, for every dollar of income, funds spent between 7.6c and 22.8c on management related expenses – quite a wide variance. 

The report also includes data on the proportion of hospital charges covered by a fund. In theory, if a fund paid a higher proportion of the hospital charges that would be good, right? The report found there was a wide variance in the amount that each fund would pay out for hospital stays – between 79.4% (bad) and 93.8% (better) on a nationwide basis.  

Now, one might think, aha! I can use information about which fund is paying out:

• the most of benefits paid overall; 

• the most for hospital; and 

• the least on management expenses 

to easily see which one is the best. 

Well, maybe not.  

As the table below shows, this information does not lend itself to easy comparison and is only the average for each fund, not the individual plan.

What the Ombudsman report shows is that there isn’t a clear link between hospital benefits, management expenses, and proportion of hospital charges covered.

The fund paying the highest proportion of hospital benefits (93.8%) has the second-highest proportional spend on management expenses (22.8%) and the second lowest benefits paid as a proportion of contributions (78.2%).  

Meanwhile, the fund paying the lowest proportion of hospital benefits (79.4%) has fairly low management expenses (10.6%) and the highest benefits paid as a proportion of contributions (90.4%).

No payment gap to the rescue? 

Another consideration for consumers when assessing a policy is the agreements insurers have with hospitals to ensure no payment gap. This is often used in marketing to signal a good deal. 

According to the Commonwealth Ombudsman, “Known gap schemes are an arrangement where the insurer pays an additional benefit on the understanding that any fee charged by the medical provider is lower than the limit set by the insurer. For example, the insurer may limit the provider to charging a gap fee to the consumer of no more than $300.” 

ACT has the lowest percentage of services with a no gap/known gap payment, at 91.4% (including restricted funds), while SA was the highest at 99.2%. 

Interestingly, the fund that had the highest benefits paid (good) was also tied for the lowest percentage of services with a no gap/known gap arrangement (bad).  

So, while it may seem better to go with an insurer that is paying out more in benefits, if insurers do not have agreements to keep out-of-pocket gap fees down, this might not be such a great deal. 

Confused? Well, you should be. Complexity, unfortunately, is allowed within the PHI legislation.