Young people are deserting private hospital insurance by the thousands — and their decisions will have ramifications for all of us.

The decision to take out private hospital cover is a complex one but as costs rise Australians, and in particular young people, are coming down on the side of opting out.

Almost 37,000 fewer people have private hospital cover than a year ago.

In contrast, the proportion of the population with extras-only cover, for things like physiotherapy and dental work, is rising.

But it is hospital visits that have the greatest financial impact — on government hospital expenditure, on insurance industry pay-outs and on personal health expenses.

Young people want out

On a population basis, an ABC News analysis shows it is young people who are rejecting private health insurance at the highest rate, suggesting that current policy settings designed to attract them into the private system are no longer working.

Hospital insurance coverage reached its high point in 2014, when 47.3 per cent of the population was covered, according to APRA data. That has now fallen to 45.5 per cent, the lowest proportion since 2010.

The proportion of people with hospital insurance fell in all age groups under 70 in the year to December 2017.

The biggest falls were in the Generation Z age group (20 to 29 year olds) and millennials aged 30 to 39.

Together, there are now 49,000 fewer people in these age groups who have hospital insurance than there were a year ago.

Private system needs the young and healthy

Geoff Summerhayes, an executive board member of the Australian Prudential Regulation Authority, has suggested the proportion of the population covered by private health insurance is likely to fall further and less young people insured will push up premiums.

"The prospect of a shrinking, ageing and less healthy population of health insurance policyholders raises questions for APRA about the industry's long-term sustainability."

It is not hard to see why — with medium singles hospital insurance costing $1,711 on average, young people typically pay more in premiums than they claim.

The maximum age you can be a dependant on your parent's insurance policy is 25, so the falling coverage for millennials points to this group not signing up to hospital insurance when they come off their parents' cover.

Incentives are losing their impact

So what about encouraging millennials to have hospital cover?

A Medicare Levy Surcharge of 1 per cent of taxable income on high income taxpayers who don't have private hospital cover kicks in at $90,000 for singles.

But few people between the age of 30 and 39 earn that much — the latest Census data showed that 80 per cent earn less than $90,000.

The Government's other incentive, the Lifetime Health Cover loading, is designed to get young people to buy hospital insurance.

Anyone who does not have hospital cover on the July 1 immediately after their 31st birthday pays an extra 2 per cent for insurance for every year over age 30, if and when they sign up for insurance, capped at 70 per cent.

The penalty disappears after paying insurance for 10 years.

The chart below shows the cumulative effect of delaying insurance for a single person who turned 31 before July 1 this year.

Delaying by 10 years saves $14,510.

Dr Duckett says although the savings are large, most people who opt out wouldn't put the money in the bank.

"It's about current income versus future costs. I think for that reason, many people aren't able to make those trade-offs," he said.

Would a discount work?

The most recent measure is a discount of up to 10 per cent that insurers will be able to offer to under 30s from April 1 next year.

Insurers will be able to offer them discounts up to 2 per cent a year up to a maximum of 10 per cent, phased out by age 41.

Stephen Duckett, health program director at the Grattan Institute, wrote in The Conversation that 25-year-olds with insurance will certainly benefit from the discount, but few Australians were in this category.

"And whether a 10 per cent discount is enough to increase health insurance uptake by young people, many of whom are in precarious employment arrangements or unemployed, is a question for the marketeers."

Not 'running for cover'

When the Lifetime Health Cover Loading was introduced in 2000, the government-subsidised advertising campaign encouraged people to "Run for cover".

It had an immediate effect — the proportion of people with hospital insurance leapt from 31 per cent to 45 per cent in a year.

Lesley Russell, adjunct Associate Professor at the Menzies Centre for Health Policy at the University of Sydney, says the "Run for cover" campaign drove people to private health insurance but their decision was not necessarily based on economic reasoning.

"It's an enticement that's not evidence-based to persuade people to buy a product that they don't really want and perhaps don't even really need."

The fall in the number of insured millennials suggests that turning 31 is no longer the incentive it once was. Or it might simply be that escalating insurance premiums have overtaken concerns about paying more later in life.

Professor Russell calls this group the "young invincibles" — they're out of university, starting jobs, unmarried and more interested in getting on the property ladder.

She says they may no longer be prioritising health cover.

"It may be that they are smart enough to know that the financial numbers might mean they are actually better off self-insuring," she says.