My phone call last week went something like this ... “Hello [insert name of health insurer I’ve been faithfully paying premiums to for about two decades], it’s me: Jess.”

“What is the minimum level of coverage I can maintain and avoid paying the Medicare Levy Surcharge?”

Illustration: Dionne Gain

The answer? A $790 saving on my annual premium and a downgrade to my hospital cover to remove cataract surgery, hip replacements and a grab bag of other procedures that, as a healthy 38-year-old CrossFit enthusiast and recent first-time marathoner, I've decided I can risk losing.

I’ll keep my extras cover, though, because a review of my claim history over the past year shows I get more back than I pay.

But, as Australia’s private health insurance industry slides into a “death spiral” of rising claims and exiting younger members, I’ve finally joined the rush – if not quite out the door, then one foot out.

By my calculations, if I’d made the switch two decades ago, I could have saved about half the bill I’m about to pay the state government for stamp duty on my first property purchase.

Still. Better late than never.

I have the Grattan Institute’s health expert Stephen Duckett to thank for his two excellent reports on the parlous state of our private health insurance industry.

Addressing the National Press Club on Wednesday, Duckett succinctly summarised his findings: “When we looked at the private health insurance industry, we found an industry strangled by red tape, riddled with perverse incentives, suffering learned helplessness, turning to government to fix all its problems, and labelled by the regulator as complacent.”

Having aptly diagnosed the problem, the second of Duckett’s reports, released this week and co-authored with Matt Cowgill, mercifully offers a way forward to reform our broken system.

Before we start on their solution, however, it’s worth noting the debate around private health insurance has traditionally fallen into two simplistic camps: abolish the private health insurance rebate completely, or radically increase it.

It won’t surprise you to learn the health insurance industry runs the latter argument, warning of a hoard of uninsured patients clogging the corridors of public hospitals unless the industry gets the subsidy it wants.

On the other side of the debate, many urge the federal government, and a future Labor government in particular, to simply scrap the rebate altogether.

The answer, say Duckett and Cowgill, is to do neither. Australia’s unique hybrid health care system – of public and privately provided care – is not so easily unscrambled.

That’s not to say the rebate presents good value for taxpayers. Do the savings to the public health system justify the $6 billion annual price tag of the rebate? Unlikely: “The evidence suggests that the cost of the subsidy to the budget is much larger than the amount it saves in public health care.”

But scrapping the rebate altogether would only accelerate the current death spiral: “For this reason, the surcharge should not be abolished in the short term.”

While keeping this carrot to tempt people into private cover, Duckett and Cowgill say it’s time to phase out the two major sticks that force younger people to take out a product which may not suit their needs.

Those sticks are the Lifetime Health Cover loading, which increases premiums for those who fail to take up cover before their 31st birthday, and the Medicare Levy Surcharge, which is an extra whack at tax time for higher income earners who do not have eligible cover.

Both could be phased down over time until they disappear completely.

Most controversially, however, the report recommends the abolition of the so-called "community rating" system, which forces insurance companies to charge every Australian the same health premium for a given level of cover, regardless of their age, and therefore their risk of claiming.

The idea behind community rating is noble indeed: that the young subsidise the care of the old, which they will one day become. But the ageing of the population has placed this intergenerational pact in peril, with the rising cost of care dwarfing the ability of young families to pay.

Denying insurers the ability to charge premiums according to actual risk is unique in the insurance world, where younger drivers typically pay higher premiums, as do homeowners located in riskier suburbs.

Time, say Duckett and Cowgill, for health insurance to be treated the same. Younger families would pay lower health premiums reflecting their lower risk, staunching some of the outflow of young people from the system.

Over-55s may face higher premiums, but insurers should have to treat them as a group, so that premiums do not continue to rise as people age. To offset higher premiums, the health insurance rebate should be redirected towards older Australians over time.

And the rebate on extras cover should be abolished for everyone, with the taxpayer savings redirected towards public dental and optical services.

Premium increases for older Australians could also be avoided if reforms to stop some greedy doctors from overcharging or performing unnecessary procedures were pursued.

“The industry should hear loud and clear that the age of entitlement is over,” says Duckett. “The industry, if it wants to be attractive to consumers, should be allowed to offer products that consumers want. This is how a market works.”

If no reform is forthcoming, Duckett warns health insurance premiums will continue to balloon by 5 per cent a year for the coming decade.

Depending on your level of faith in government policy-making, today might be a good day to pick up the phone.