Western Australia's largest health insurer will cut benefits for customers with sub-premium hospital cover as it grapples with rising costs.

From July 1, HBF members on basic or mid-tier hospital policies will no longer be covered for a spate of services, including weight loss surgery, dialysis and psychiatric care.

Those with basic policies will also lose coverage for cochlear implants, insulin pumps and sterilisation reversal procedures, while some members will pay an excess for day surgery.

HBF is the second major insurer to cut hospital benefits this year, after Australia's largest fund, Bupa, last week revealed it would wind back cover for 700,000 members.

John Van Der Wielen says some members will no doubt be disappointed. ( ABC News: Marcus Alborn )

HBF chief executive officer John Van Der Wielen said the insurer was trying to limit future premium increases, because affordability was "the major concern" for members.

"We believe it's fairer to ask for those members who need to claim for certain services to move to that next level of cover," Mr Van Der Wielen told the ABC.

"Psychiatric covers and bariatric surgery are two areas that are really blowing out in cost and we need the members to upgrade their policies should they wish to take cover.

"Some members no doubt will be disappointed, but … we're not taking covers off people, like some health insurers may do.

"What we're asking people to do is upgrade their covers if they wish to choose those services."

HBF is in the process of writing to the majority of its members — it has just over 1 million — to inform them of the changes.

"I do believe if HBF cannot get its premiums down to a rate close to inflation, then we will lose more members," Mr Van Der Wielen added.

On average, HBF premiums will rise by 3.75 per cent from April 1, which is below the industry average of 3.95 per cent, but almost twice the rate of inflation.

HBF pays 91.4 per cent of its hospital premiums back to members in rebates.

More people will drop cover: Duckett

Grattan Institute health program director Stephen Duckett said health funds across the industry were trying to reduce costs.

Stephen Duckett says health funds are running the risk of putting off more customers. ( ABC News )

"Part of this is tailoring products which have less coverage or less comprehensive products, and so the cost of those products will go down," Dr Duckett said.

"In terms of the statistics, what we'll see is more people … dropping their level of coverage, which is a trend that's been happening for the last five to seven years."

Under new Federal Government policy taking effect on April 1 next year, health insurers will be required to categorise their hospital policies into four groups — gold, silver, bronze and basic.

The changes are designed to simplify the complex web of health insurance products and allow consumers to shop around.

"I think [the funds] might be preparing for that by tailoring what might be in the basic bronze coverage," Dr Duckett said.

However, the Grattan Institute economist believes funds are at risk of fuelling "increasing dissatisfaction" among customers.

"The more you … don't provide a particular sort of coverage, the more people get disappointed or angry or both when they find that they don't have the coverage that they expected," Dr Duckett said.

But Mr Van Der Wielen says rising health costs — charged by hospitals and medical professionals — have necessitated "tough decisions".

"Health is one of the few areas where technology does not reduce costs," he said.

"Undoubtedly, the ageing population is using health services more than they ever have."

Financial headwinds and merger plans

Now 77 years old, HBF is no different to other health insurers in facing significant financial headwinds.

The fund's health insurance division made an underwriting loss of $24.6 million in the 2016-2017 financial year.

But the organisation managed to post a surplus overall, due to investment returns and other income.

Last month, HBF revealed it planned to merge with Sydney-based not-for-profit HCF to create a new $4 billion health fund.

If approved, the merger would create the nation's third-largest health fund, with more than 2.5 million members.

HBF has an 8 per cent share of the national health insurance market.