Australia's health care system has become increasingly unfair, costly and confusing, according to a new report, which has declared the Federal Government is facing an impending crisis which can only be averted by urgent reform.

Key points: The report forecasts an 'exodus' of young and healthy people from the private health system

The report forecasts an 'exodus' of young and healthy people from the private health system Private HealthCare Australia says insurers are struggling to cope with older, sicker patients

Private HealthCare Australia says insurers are struggling to cope with older, sicker patients The Grattan Institute says the Government needs to consider industry reforms within 18 months

The Grattan Institute report paints a bleak picture of the private health system, saying it has become "riddled with inconsistencies and perverse incentives".

It said if current trends continue, Australia will find itself in a "death spiral", where young and healthy people abandon private health cover, leaving a larger proportion of unhealthier, older and expensive users.

That will keep forcing premiums up, leading to a further exodus of healthy users, and placing insurers under immense pressure to contain costs.

The Grattan Institute's Health program director, Stephen Duckett, said inevitably, the government would be faced with the question of how to manage such a crisis.

He said government subsidies and financial penalties to encourage people to take out private insurance were already becoming less effective, and the government needed to ask itself whether subsidising private health care was justified.

"The [government] is going to have to step in sometime, probably in the next 18 months or so, and it's going to have to confront the issue about its very policies, its red tape, needs to be addressed and how is it going to do that, and what is the future of the industry," he said.

"Just supporting the private health insurance rebate is not enough, the industry needs reform, it needs reform in terms of the way it's regulated, it needs reform in the way the various parts of the industry react to each other.

"In the absence of purpose of action to address some of the underlying problems of the industry, it could be in this death spiral."

'It's a waste of money'

Nathan Wood, 33, works in the music industry and is one of those healthy young people who has recently abandoned private health insurance.

He used to have basic cover, but when he had to pay more than $1,000 in out-of-pocket costs for day surgery, he questioned the value of his insurance.

The Consumers Health Forum said questions about the value of private insurance are not new. ( ABC )

"I had a procedure done and was talking to one of the nurses when I went in and she asked if I had health insurance, and I said I did, but I had a basic package and it didn't seem to cover anything," he said.

"She said 'we find that quite a lot actually and that we usually just mention to young people that it's probably not worth it for young people a lot of the time'.

"Pretty surprised to hear that from a healthcare worker herself.

"If it comes up in conversation I pretty much refer to it as a waste of money."

The private health insurance industry's peak representative body, Private HealthCare Australia, agreed the exodus of young people like Mr Wood presented a challenge for the sector.

Private HealthCare Australia chief executive Rachel David said just like the Medicare system, private health insurers were struggling to cope with older, sicker patients.

"We know people are not willing to pay much more in premiums than they currently are doing," Ms David said.

"But the trouble is when you have this large population that's going through the system and they're requiring more surgery and they're living longer, what the younger person — the younger and healthier person — sees is their costs are going up, and they're not perceiving they're getting anything for it because they're subsidising the older generation.

"Those challenges are well documented and we think it's time to stop talking about the problems and start to implement some practical solution to premium increases to improve access to things like elective surgery."

But she said the private health sector had an important role to play in relieving pressure on public hospitals.

"If more people drop out, I think what you are going to see is increasing pressure on hospital waiting lists, particularly for essential non-emergency surgery like joint replacements," she said.

"We know if participation was to drop from 45 to 30 per cent there would be an additional 10 million people on hospital waiting lists."

Report sparks calls for inquiry into healthcare sector

Consumers Health Forum chief executive Leanne Wells said the report should spur the Government into establishing a wide-ranging inquiry into the sector.

"The deep-seated questions to be asked about private health insurance and its value to both individuals and the system given the long-term challenges it faces are not new," she said.

"Most Australians would expect the national health system to ensure equitable access to quality health care for all.

"The current arrangements are eroding that, and we need to turn that around."

In a statement, a spokesman for Health Minister Greg Hunt said the Government was already delivering the most significant reforms to private health insurance in over a decade, which will make insurance simpler and more affordable for Australia.

"Work has already commenced with the healthcare sector to identify and implement the next wave of positive reforms for private health care to continue to improve the affordability and value for consumers and ensure the system remains sustainable," he said.

"Australia has one of the best health systems in the world which is underpinned by private and public health care."