Analysis

Each year, the federal government pays health funds more than $5 billion to subsidise health insurances.

It is a significant sum of money, more than one-third of the total amount it pays to the states and territories for all health services and infrastructure.

At $5.4 billion this financial year, rising to $5.91 billion by 2016-17, the money pays for the 30 per cent rebate for most Australians who take out private health insurance.

The rebate is supposed to keep costs down for consumers, but - as evidenced by the 6.2 per cent average increase in premiums announced on Monday - there is little evidence the rebate has achieved this in any meaningful way.

Introduced in 1999, the rebate seemed to keep costs down for its first three years, largely due to a pre-election decision of the Howard government in 2001 to keep premiums flat.

The next year, after the Coalition was re-elected at the polls, premiums were raised by almost 10 per cent.

Since 1998, the average health insurance premium has risen by 130 per cent, while overall prices have gone up by less than 50 per cent. Much of the problem lies with how the rebate intersects with the other measures to encourage people to take out private health insurance.

While the rebate is the carrot, it's the stick of a higher Medicare levy for middle and high-income earners. Coupled with lifetime cover provisions - which penalise people over 30 who haven't taken out insurance - it's a pretty big stick.

But it provides little incentive for health funds and hospitals to be more efficient.

And, as the stick encourages more people to join health funds, the cost of health insurance, and the rebate, keeps going up.

The rebate itself is a highly circuitous and inefficient way for the government to invest in healthcare. Private health insurers take their cut in profit for essentially re-directing the funding into health spending.

The introduction of the means test for the rebate highlighted how little it impacts on health fund membership. Amid predictions from the health fund industry that there would be a mass exodus of members, numbers have increased since it was introduced.

One study predicted 2.8 million would drop their cover in the first five years.

The truth is that some 12.8 million people are covered by health insurance now, compared with 12.4 million when means testing was introduced.

A serious re-examination of health funding is required, especially with an ageing population. The government must investigate whether the rebate works to reduce health costs to consumers. Or makes little difference over the long term, but at a whopping cost to taxpayers.