Young Australians are being targeted in the biggest overhaul of private health insurance in decades, with premium discounts on the cards and a big focus on mental health.

Key points: Discounts of 2 per cent a year for a maximum of five years for people aged between 19 and 29

Discounts of 2 per cent a year for a maximum of five years for people aged between 19 and 29 Any insured patient entering a hospital with a mental illness could immediately upgrade their policy to full cover

Any insured patient entering a hospital with a mental illness could immediately upgrade their policy to full cover Health insurance products would be categorised into Gold, Silver, Bronze and Basic

The ABC can reveal the Federal Government plans a raft of transparency and affordability measures to help take the pressure off health insurance premiums, which have increased by an average 5.6 per cent a year since 2010.

Central to the strategy will be encouraging more young people to take up private health insurance, with discounts of up to 10 per cent for the under-30s and a drive to make a mental health safety net part of standard coverage.

It also plans on generating savings of at least $300 million per year by mandating price cuts for procedures including replacement hips and pacemakers.

It is understood these savings are the result of a particularly hard-fought battle between the Government and medical device suppliers.

Discounts for young people

To entice young people to take out health insurance, funds will offer discounts of 2 per cent a year for a maximum of five years for people aged between 19 and 29.

For example, a 19-year-old who takes out health insurance would be offered a 2 per cent discount on his or her premium, building to a 10 per cent discount by the time they are 24.

That discounted rate would remain until they are 40, after which it would be phased out.

Attracting more young people into private health insurance is critical to keeping the sector sustainable in an ageing population.

Boosting mental health benefits

The changes to private health insurance will see a much greater focus on mental health, with many existing policies having low benefits for mental health conditions.

The ABC understands that privately insured patients entering hospital with a mental illness will be offered an immediate upgrade of their policy to fully cover mental health, with no waiting period.

Some low-cost policies attract co-payments of up to $1,000 a day for mental health stays.

Recent industry statistics have shown that mental illness has now overtaken non-caesarean childbirth as the leading causes of hospitalisation for women under 30.

For men under 30, mental illness is in the top three causes of hospitalisation, after dental and sporting injury.

About 90 per cent of day admissions for mental health are currently paid for through private health insurance, and 50 per cent of all mental health admissions.

New product ratings for all health policies

Health insurance products will be categorised into four levels of cover — Gold, Silver, Bronze and Basic — to help consumers understand what types of services their insurance buys.

The Government believes new categories will help Australians compare private health insurance products and shop around for a better deal.

The ABC understands the Government has resisted pressure to dump low-cost policies, regarded as "junk" policies by some consumer groups, because of the flow-on cost it would have on other insurance premiums.

Modelling commissioned by the Private Health Insurance Ministerial Advisory Committee showed removing "basic" cover would increase premiums by between 15 and 21 per cent and result in more than 100,000 people dropping their cover.

Mandated cost cuts for cardiac and orthopaedic implants

To drive down costs of private health insurance, the Government will regulate reductions for certain benefits and procedures.

These include cardiac devices such as pacemakers and implanted defibrillators as well as orthopaedic implants such as hips and knees.

Some of these services are up to five times the market cost. The private health care industry says industry kickbacks to doctors and some private hospitals are encouraging inflated prices.

The ABC believes the Government plans on generating savings of about $300 million a year through the measure, starting next year, with the money ploughed back in reducing premiums for customers.

The Australian Prudential Regulation Authority will be tasked with ensuring every dollar offsets premium rises in 2018.

Rather than an annual premium rise of 5-6 per cent next April, as has been the case for several years, the plan is aimed at keeping premium rises as low as 3 per cent.

Increased oversight to take action on complaints

The role of the Private Health Insurance Ombudsman will be expanded and strengthened, allowing it to conduct inspections and audits of private health insurers to ensure they are meeting regulatory obligations.

Six extra PHIO investigators will be focused on addressing consumer complaints about private health and private hospital treatment, including prostheses.

Health funds currently volunteer records to the PHIO in order to investigate complaints.

The strengthened investigative powers will allow the PHIO to access records of phone calls, letters and emails overlooked by insurers in response to the Ombudsman.