Today’s Grattan Institute working paper on private health insurance deliberately poses many questions and avoids answering them, because it is the first of a series. But there is enough background information here to confirm what many people suspect already: with private health insurance premiums rising 30 per cent in real terms in less than a decade, and 84 per cent of policies now incorporating exclusions or excesses, this is a dud product that deserves to go into “a death spiral”.

Everyone knows someone who’s had a claim rejected based on fine print, and only last week Guardian Australia revealed that the country’s biggest private insurers had systematically and illegally rejected thousands of claims based on pre-existing conditions without seeking a doctor’s opinion. Equally important, what are taxpayers getting for the $6.5 billion and rising that is spent annually on the private health insurance rebate? Going by the Grattan Institute’s paper, the value proposition here is marginal at best.

The paper, by Stephen Duckett and Kristina Nemet, charts the decline of private health insurance cover from the introduction of Medicare, when it covered 80 per cent of the population, to 30 per cent by the mid ’90s, when then prime minister John Howard introduced a range of incentives and penalties, including the private health insurance rebate and the Medicare Levy Surcharge. That stabilised coverage at 40–50 per cent, but recently it’s been dropping again, particularly among the young. The reason for this is made obvious in the report: premiums have risen by 30 per cent since 2010–11 in real terms, way outstripping both health expenditure and wage growth.

Duckett and Nemet write that the purpose of private health insurance is unclear – is it to complement the public system, substitute for it, or do a bit of both? – but perhaps the most damning lines question the value for money that taxpayers get by subsidising the profits of the insurers with the billions of dollars in rebates. At best, the authors write, subsidising private cover might be justified if it reduces the net cost of healthcare to government. “Even if the overall service is less efficient, and costs more, the costs to government might be lower if individuals are prepared to pay more for some of the care that would otherwise be publicly funded … because they are bundled with services that complement the health care in the public system.” Pretty tenuous, but that’s the best argument for $6.5 billion in public expenditure on the rebate.

That argument is undermined later, however, when the authors indicate how little hard evidence there is to support it, with data showing that private hospitals tend to provide less-complicated surgical procedures: “It is unclear how much of the additional activity in private health care is due to the unmet needs of patients in public hospitals and how much is the result of medical specialist-induced demand, based on patients ability to pay rather than their clinical needs. Some of the additional activity funded by [private health insurance] may not improve patient outcomes…” [emphasis added].

The report quotes Tony Abbott as Opposition leader in 2012 saying that private health insurance is in the Coalition’s DNA, and says that the Coalition’s rhetoric since 2013 has been that Medicare is unsustainable and should be a safety net provider, with more Australians taking out private cover. Health Minister Greg Hunt today resisted Labor’s call for a Productivity Commission inquiry, saying in a typical bit of hyperbole that the government was “already delivering the most significant reforms to health insurance in more than a decade”. Shadow health minister Chris Bowen today said, “I don’t think anybody’s proposing getting rid of the private health insurance subsidies. Certainly we weren’t proposing that at the election and certainly we’re not proposing that now.” But Bowen is wrong about that: the Greens propose to axe the private health insurance rebate altogether, and redirect the billions to the public health system. That would be a better use of taxpayers’ money than subsidising the profits of private health insurers who provide patchy coverage at a skyrocketing price.