Recent reports suggest that many Australians are downgrading or dropping their cover altogether, driven by rising costs and stagnant wages.
These may be individual decisions influenced by household budgets, but taken together, they could gradually shape broader outcomes within the system.
When healthier, younger Australians opt out of comprehensive cover, the insurance risk pool shrinks and becomes less stable. This is classic adverse selection. The people most likely to need care remain, while those who claim less drift away.
While rising health insurance premiums are driven by multiple factors, insurers also depend on cross-subsidisation, where lower-risk members help offset the costs of higher-risk ones, to maintain affordability across the system.
As that balance erodes, the burden increasingly falls on those who need it most, which includes health-impaired or older members with higher and costlier healthcare needs.
The result is a vicious cycle as premiums rise to cover growing costs, prompting even more healthy and younger members to exit.
As cover becomes less affordable, many Australians are turning to a form of self-insurance - paying out of pocket for dental, optical and physiotherapy services that fall outside Medicare.
While that might work for some, it’s an unsustainable model for others.
We’ve seen similar patterns in property insurance, where affordability issues have pushed people out of the market and back toward government safety nets.
As more people retreat from private health cover, the pressure on the public system grows, leading to increased demand for services, longer wait times and higher public costs. In turn, this can lead to higher taxes in the form of the Medicare levy.
There’s also another tax sting that may come as a surprise for younger Australians who want to opt out of the private system, perhaps temporarily while money is tight.
Under the Lifetime Health Cover rules, anyone who doesn’t take out hospital cover before age 31 may face a surcharge that grows the longer they remain uninsured.
While designed to keep younger people in the pool, such policies are only effective if they see value in staying there.
Unless it becomes more affordable, transparent and genuinely beneficial across life stages, the exodus will continue and taxpayers may foot the bill.
On the flip side, if public health services deteriorate due to increased reliance on the public health system, Australians may still see value in private health insurance as a way to secure timely and quality care.
The longer-term implications on the health system remain to be seen, but one thing is clear: a sustainable health system will require strong collaboration between government, insurers and providers.
Ultimately, it is about building and maintaining a health system that is fair, sustainable and provides genuine value to the Australian public.
Dr Twane Wessels is an Assistant Professor of Actuarial Science in the Bond Business School.