<i>Illustration: Karl Hilzinger</i>

Beat that … regulation of private health insurance premiums could undergo a review. Illustration: Karl Hilzinger

Leading health fund Medibank has called for ''lighter touch'' regulation of premiums, arguing that allowing insurers to compete more freely on price would help rein in future increases. Consumer groups, however, remain to be convinced.

The reform proposal comes amid a series of changes to government incentives that mean the costs of private health insurance (PHI) are rising more than usual for some.

Each year, health funds must seek permission from the federal government to increase premiums.

The Minister for Health usually decides most applications in February, with increases to apply from April.

These applications are being filed now, with an average annual increase of 5 per cent believed to be on the cards for 2013 for the third year running.

A report authored by Deloitte Access Economics for Medibank says this approach offers funds ''herd protection'' - premium increases tend to cluster around a tight average, it says.

In addition, denied an incentive to compete on price, funds respond by competing on product offerings, only to confuse people with a plethora of policies, and with all sorts of limitations and exclusions.

''The current system that governs the way private health funds set their prices isn't consistent with best practice,'' the head of policy and regulatory affairs at Medibank, Jane French, tells Weekend Money.

''Currently, all funds put their prices up at the same time each year and these increases are generally tightly clustered around an average increase,'' French says.

''This system doesn't offer consumers a great deal of choice and doesn't promote competition between funds.''

The Deloitte report favours a ''price monitoring'' approach that puts private health insurers under the watch of a body such as the Australian Prudential Regulation Authority, rather than the minister.

It says this sort of approach would encourage funds to be more cost-efficient, resulting in lower premium increases than might otherwise emerge.

And the government would still be able to re-exert price control if it became necessary.

The report carries the imprimatur of former Australian Competition and Consumer Commission chairman, Allan Fels, who provides its foreword.

Fels says the goals of the current regulatory arrangements are ''laudable'' but the arrangements ''may have the unintended consequence of inducing greater increases in premiums than would otherwise occur''.

''There is, in my view, great merit in having the discussion the study seeks to start,'' Fels says.

''Having reviewed the report, it does seem clear that a more light-handed approach to price regulation would be warranted.''

Consumer group CHOICE says it supports any move that would ultimately result in more affordable health insurance.

''But it's far from clear that a complete scuttling of controls on premium increases would have this effect,'' spokeswoman Ingrid Just says.

''The private sector has a habit of pushing hard for deregulation on the grounds that increased competition will benefit consumers, but often it turns out that the profit motive is the real driver. CHOICE supports an independent review of the current regulatory framework in principle, as long as the review includes robust consumer representation and input.''

She says the current system works quite well.

For example, this year the minister asked 24 of 34 health insurers to resubmit their applications with further evidence to justify their requested increases. Seven of the 24 funds subsequently reduced their premium increases.

The chief executive of Consumers Health Forum, Carol Bennett, says many people are finding continued premium increases hard to manage.

Australians now spend on average $195 a month, or $2340 a year, for combined hospital and extras health insurance, according to researcher CoreData.

''For consumers, this is not necessarily the best model, and looking at other models is a good idea,'' Bennett says. ''But you have to do that with consumers.''

Groups such as the Consumers Health Forum were not consulted for the Deloitte report.

''We have to be sure that we don't lose the consumer protections that are built into the current system,'' she says.

''Yes, we are happy to look at alternatives, but let's ensure these alternatives protect consumers - and to do that you have to have consumers involved in the process of redesigning and administering the new system.''

In July, the government started means-testing the private health insurance rebate, so that the subsidy tapers off for people earning more than $83,000 a year (or $166,000 for a couple or family).

The 30 per cent tax rebate drops to 20 per cent for individuals (under 65) who earn between $83,000 and $96,000, and to 10 per cent for people on $96,000 to $129,000, after which it cuts out.

Last month, the government also announced that from 2014 the rebate would be linked to consumer price index inflation, not directly to health insurance premiums.

That will reduce the subsidy the government pays because general inflation is lower than health insurance inflation.

An independent comparison of the coverage and costs of individual insurance products can be found at privatehealth.gov.au.