Australia's private health insurers' profits have surged more than 18 per cent on the back of last year's premium hike and a better return from investments.

Key points: The percentage of the population with private health insurance continues its slide from its peak two years ago

The percentage of the population with private health insurance continues its slide from its peak two years ago Out-of-pocket expenses rose 4.3pc for hospital care and 3.5 per cent for ancillary services

Out-of-pocket expenses rose 4.3pc for hospital care and 3.5 per cent for ancillary services Despite an 18pc increase in profit, industry margins have narrowed

Quarterly data from the Australian Prudential Regulation Authority shows profit across the private health insurance sector was up 18.2 per cent to $1.3 billion over the year to April.

This covers the period since the average 6 per cent premium price rise approved by the Federal Government in 2016 came into force.

The industry was granted another 5 per cent increase earlier this year which came into effect last month.

Premium revenue rose by 5 per cent, or $1 billion, to $22.8 billion over the year.

However, this was slightly outpaced by the 5.4 per cent growth in benefits paid out.

Overall, the net margins in the sector narrowed from 5.6 per cent to 4.8 per cent over the past 12 months.

While this year's 4.8 per cent increase in premiums was the smallest in a decade, it was still three times larger than the inflation rate, pushing up the top family hospital coverage by around $200 a year to $4,500.

Singles cover rose on average by $100.

Insurers asked for bigger premium increase

Grattan Institute health program director Professor Stephen Duckett said the 18 per cent increase in profit needed to be viewed in the context of the insurers seeking higher premiums than were ultimately rejected.

"Maybe it is a sign there was padding [in the insurers' claims] and the minister was right in telling them to go and sharpen their pencils," Professor Duckett said.

"However, given their premium revenue has gone up less than their payouts, it shows there is still a squeeze.

"They're still in a difficult place."

In other words, to halt the erosion of margins the insurers have the option of reducing benefits, risking the ire of customers who are already dropping out or cutting back their cover, or negotiating a better deal with hospitals and medical suppliers.

The other option is the Government waving through more generous increases next year, although that may well be a political cost no government is prepared to pay.

Gap payments rising

Despite a net gain of 26,000 insured people over the quarter, the percentage of the population covered continued to slide from its peak of two years ago.

The insurers showed they had managed to rein in surgery costs, with hospital benefits paid out declining almost 6 per cent, with the prices falling in all key areas of prosthetics including cardiac and hip and knee replacements.

However, general ancillary benefits paid out jumped 7.6 per cent over the quarter, with the biggest rises in chiropractic and physiotherapy services.

Average out-of-pocket expenses for hospital care rose 4.3 per cent to $318 over the year, while the gap for general ancillary services was up 3.5 per cent to $48.

APRA does not break down the components of the profit increase, but noted total net assets among the insurers, which includes the value of investments in shares and bonds, as well as property, grew by almost 9 per cent to $13.6 billion.

The dominant player in the market, Medibank Private, announced a 2 per cent rise in its half-year profit that was largely propped up by its investments.

While Medibank's investment income more than trebled in the six months to the end of the year, profit from the health insurance business fell by 8 per cent.