"Governments have failed to clearly define the role of private health insurance since Medicare was introduced in the 1980s. The upshot is we have a muddled healthcare system that is riddled with inconsistencies and perverse incentives," the report, co-authored by former health department secretary Stephen Duckett, said.

The Grattan Institute argued the government had two options: either abandon "inequitable" subsidies, such as the 30 per cent premium rebate, entirely, or subsidise the private sector as a genuine alternative to Medicare. While not explicitly taking a position, the report's arguments were weighted towards abolishing government subsidies.

But Mr Fitzgibbon said abandoning subsidies would immediately add 30 per cent to the cost of insurance premiums – the amount currently met by the government's health insurance rebate at a cost of $6 billion a year – leading to an exodus from private health funds and rocketing Medicare costs.

"Naturally that would hurt the sector," he said. "But the other big consequence is all these people would fall back on the public system."

Mr Fitzgibbon put the cost of abolishing the rebate to Medicare at around $15 billion – though he did not say how he arrived at that figure.

While Mr Fitzgibbon accepted his proposal would be politically divisive, he rejected the suggestion that the life-and-death nature of healthcare was an argument against privatisation.

"I don't know why health insurance is any more life-and-death than the food we eat and the homes we live in, and we don't make that a government monopoly," he told the Financial Review in a separate interview. "In this [proposal] people still get healthcare, it's just that rather than doing it through a social, government-run insurance system, they do it through a private system. So healthcare doesn't disappear."


He denied his radical proposal was evidence of an industry in a death spiral, insisting under current rules his business was doing well, and had not seen the 8 per cent reduction in the number of younger customers experienced by the industry as a whole.

'Doing well'

"Under the suite of policy reforms that have been put in place, the industry is doing well. We’re doing well as a business," he said. "The medium to longer term death spiral that Grattan is talking about is probably more applicable to the public financing of healthcare."

Siddharth Parameswaran, an analyst with JP Morgan, said on the current trajectory things were getting "tougher" for private health insurers, and some change was necessary. But he said the Grattan Institute's proposal to remove subsidies entirely was unlikely to become government policy.

"If nothing changes, it will probably get tougher for private health insurers. I think the whole industry would like to see some action taken to improve sustainability of the system," he said.

“If you were to totally remove government support, I think you’d have to get rid of the forced cross-subsidies as well, which currently make the policies affordable for the elderly. I don’t think that’s on the horizon for either side of politics. The reality is that this magnitude of change would be very difficult to achieve. There are many interested parties in the health sector."