Tracy Lee Jurg has had private health insurance her entire life.

Key points: The Grattan Institute's report has called for the so-called "community rating" system to be partly deregulated

The Grattan Institute's report has called for the so-called "community rating" system to be partly deregulated A spokesman for the Health Minister Greg Hunt said the Grattan report's recommendations would lead to the "Americanisation of Australia's health care system"

A spokesman for the Health Minister Greg Hunt said the Grattan report's recommendations would lead to the "Americanisation of Australia's health care system" The government spends about $6 billion a year propping up the private health insurance industry through the income-tested rebate

However, the 43-year-old single mother from Perth said the system was now letting her down.

"I don't think anyone believes they're getting value for money anymore," she said with a laugh.

"It has to be reformed.

"It's becoming extremely costly, you're not getting the same benefits you used to, and more and more people I know are pulling out because they just can't afford it."

Public policy think tank Grattan Institute has put forward its case to overhaul the sector, in a radical new proposal aimed at making the system sustainable.

Currently, everyone pays the same amount for the same level of private health insurance coverage — whether they are young, old, sick or healthy.

However, the Grattan Institute's new report has called for the so-called "community rating" system to be partly deregulated, meaning insurers would be free to charge younger people less money, and in turn, older people more.

Tracy Lee Jurg says private health insurance needs to be overhauled to make it viable for people to take up. ( ABC News: Hugh Sando )

The Grattan Institute's health program director Stephen Duckett said a rise in premiums for older Australians was inevitable regardless of the proposed change, as more young people fled the system.

"Even though community rating might appear on the surface as ensuring people can get access to health insurance, it's got a fatal flaw," he said.

"What's happening now, is young people don't see health insurance as value for money.

"There's so much of a cross-subsidy to older people that they're saying: 'why should I be in health insurance at all?' so they're dropping out, which means premiums go up, which means more people drop out."

While the report calls for partial deregulation of the system, it argues the community rating system should remain in place for sick Australians and those aged over 55, to ensure the most vulnerable are not forced out of the market.

Dr Duckett has recommended some of the private health insurance rebate be redirected towards older patients, and cut from low-coverage policies.

The government spends about $6 billion a year propping up the private health insurance industry through the income-tested rebate.

"By reallocating the rebate, you are able to moderate the premium for older people," he said.

"Instead of the cross-subsidy taking place within funds, and having all the floors of community rating, basically the cross-subsidy is done by government through the structuring of the health insurance rebate."

He said part of the rebate should go towards funding public dental care.

The report is the second in a series titled Saving Private Health, with the first instalment arguing private hospitals will need to hold "greedy" doctors to account if they are to survive the so-called "death spiral".

Stephen Duckett, the Grattan Institute's health program director, said a rise in premiums for older Australians was inevitable regardless of the proposed change, as more young people flee the system.

'A disaster for private health': insurers

Private Healthcare Australia chief executive Rachel David agreed change was needed, but argued the Grattan Institute's proposal was not the way to do it.

"While we have some challenges with the community rating system, and what they're proposing while in academic theory may sound good, it would actually be a disaster for private health in Australia's health system," she said.

"While it would be cheaper for younger people, they would be priced out of the market — we would see a between 10 and 20 per cent rise in premiums.

"We need to consign it to dustbin of theories of things that would be a disaster in the real world."

Australian Medical Association Tony Bartone said alternative policy changes needed to be investigated to keep the sector robust.

"They are policy proposals which will discriminate against older Australians, and will price those who really need the care out of the system," he said.

In a statement, a spokesman for Health Minister Greg Hunt said the report's recommendations would lead to the "Americanisation of Australia's health care system."

"The Grattan Institute's proposal to abolish community rating would lead to higher costs for the most vulnerable people, people who are sick, people who have pre-existing conditions such as mental health issues and people who are aging."

A spokesman for Health Minister Greg Hunt said the report's recommendations would lead to the "Americanisation of Australia's health care system." ( ABC News: Matt Roberts )

Insurers need to develop robust strategies, regulator says

The shaky state of the private health insurance industry has also been highlighted by a consultation paper from the prudential regulator, which has declared the system is under pressure.

The Australian Prudential Regulation Authority (APRA) said insurers needed to become more resilient, and develop robust strategies to deal with the challenges of a shrinking and ageing population.

"While some insurers are evolving their business, innovating and looking at new models to provide services to their members, this is not the case with many," APRA Executive Board Member Geoff Summerhayes said.

"APRA has expressed concerns about the resilience of the sector and this has informed our approach to a comprehensive review of risk management, governance and now capital standards for [private health insurers.]"

The regulator's most recent review of the sector started last year, and is looking at how insurers guarantee they have enough money to pay out claims — even if they are hit with unexpected losses.

Mr Hunt has been trying to keep insurer costs low to bring their premium increases down, and has demanded an average rise of no more than three per cent from 2020.

A spokesman for Mr Hunt said the government will continue to consider suggestions and proposals to improve the sector.

Federal Labor has repeatedly called for a Productivity Commission inquiry into the system.

*Disclaimer: The Grattan Institute is an independent public policy think tank, with Medibank Private listed as one of its affiliate partners