The federal government is expected to approve a 5% increase in private health insurance premiums next month but industry watchdogs and consumer advocates fear it will push more to drop their policies or forgo essentials in order to pay for them.

On Monday the federal government’s deadline closed for submissions from private health insurers seeking to increase their premiums.

Under federal legislation any increase must first be approved by the health minister, who can refuse if it appears contrary to public interest. Providers will be notified of the decision in mid-February before any changes take effect on 1 April.

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In 2016 premiums increased by an average of 5.6%, a slight drop on increases of 6% for each of the preceding two years. In 2017 it is expected the acting health minister, Arthur Sinodinos, will approve a 5% increase.

“That’s on the surface not good news for consumers, particularly when we know from the ACCC and other sources that the proportion of the population covered by hospital and general has dropped for the first time in six years,” said Leanne Wells, the chief executive of the Consumer Health Network.

About 9,000 people reportedly dropped their private health insurance last year and Wells said there had been record complaints to the ACCC, particularly around poor communication by providers of changes to their policies as premiums went up and benefits went down.

“It suggests public health insurance arrangements are probably not popular with the community and people are really starting to query the value even though they value having a policy,” Wells said.

Meanwhile providers were responding to medical costs inflating at a far greater rate than income, while having a smaller pool of funds as fewer young people sign up and others drop their policies.

The Consumer Health Network has long called for an inquiry into the industry and Wells said she hoped the new minister would maintain support of the ministerial advisory taskforce, established under the former minister Sussan Ley.

An investigation by Guardian Australia in November found the problems in the private health system went far beyond the cost of premiums. Among experts is a belief that private health insurance should be scrapped in its current form and replaced with a single insurer.

Jennifer Doggett, a fellow with the Centre for Policy Development, said the whole system needed a shakeup and another increase in premiums could see further disillusionment among Australians, who may abandon private health insurance altogether.

“With premiums going up while providing less and less of a service, that’s making the product less attractive so people drop out which puts more upward pressure on premiums,” Doggett told Guardian Australia. “It’s a cycle which the Coalition, despite its best efforts, haven’t been able to break.”

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Doggett believed there were people, particularly the elderly, who held on to their private health insurance out of fear for the alternative, despite being unable to afford it.

“Do we really want them forgoing other essentials to keep up their membership for services they should be entitled to and be able to access?”

In 2015 less than half of all Australians had private health insurance with hospital cover, while about 55% had some form of general treatment cover. A consumer survey conducted that year found cost to be the primary concern for people.

Catherine King, Labor’s health spokeswoman, said on Sunday she hoped there would be less of an increase, as demand for services had been going down, apparently because of the cost, and expressed concern about the effect of industry instability.

She called for government improvements to the system to go further and in particular to increase transparency around insurance policies.

“The government has done some work in that [transparency] space but again it will be up to the new minister to continue that reform and to make sure that value for money for the products of private health insurers is there for consumers.”