How private health insurance shifts the risk to customers, taxpayers

Private health insurance works differently from other insurers, shifting risk to its customers and the taxpayer. Claudia Weisenberger explains.

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Australian private health insurers don’t assess your individual health risk before selling you a policy. That’s done with the community rating system, designed to be fair. But those companies don’t bear the risk when you make a claim. Through excesses, gap fees and exclusions, insurers have quietly transferred billions of dollars in financial risk from their balance sheets onto you as the consumer.

All while making $2.11 billion in profit and receiving $7.9 billion in government subsidies. This is the story of how they did it.

The question is, if private health insurers don’t assess individual risk and they’re not fully bearing the risk when you claim, what exactly are they insuring?

Insurance basics

In every other form of insurance, the deal is simple: assess the risk, price accordingly, and bear it when something goes wrong. Australian private health insurance operates on an entirely different basis.

Community rating was introduced by the Australian Government to make the system fair. As Private Healthcare Australia explains: “Health funds are prevented from discriminating against members based on health status, age or claims history.” A healthy 35-year-old and a 70-year-old with heart disease pay the same premium. In other words, the young and healthy subsidise everyone else.

Under the community rating system, you’d expect insurers to bear the full financial risk when you make a claim.

That’s not what has happened.

Private health insurance history

In 1997, roughly two-thirds of all private health insurance policies were “top cover” — no deductibles, no excesses, no exclusions. When you went to hospital, your insurer paid. Today, that figure has collapsed to around one in eight. According to the Grattan Institute’s 2019 analysis, “This has meant a massive transfer in who bears the risk of the costs of hospital admissions — from the private health insurers to the insured person.”

The proportion of Australians bearing their own health insurance risk has jumped from 33% to 87.5%, a 165% increase in consumer risk. CHOICE reported in March 2026 that comprehensive cover has continued to fall, from 39% of policyholders in 2020 to just 28% in 2025.

Insurers didn’t announce this transfer. They did it quietly, through four primary mechanisms.

1. Excesses

An excess is the amount you pay out of pocket for each hospital admission before your insurer pays anything. According to Compare the Market, the most common excess in 2026 is $750. If you need a hip replacement, you pay the first $750. The insurer only pays after that.

Risk transferred: $500–$1,000 per admission from insurer to you.

2. Gap fees

According to Money.com.au, “unknown gap” costs — fees not disclosed upfront — have jumped from $418 to $685, a 64% increase over five years. You pay premiums. You pay the excess. Then you discover the surgeon’s fee is $5,000, your insurer covers $2,500, and you’re on the hook for the rest.

Risk transferred: hundreds to thousands of dollars per treatment.

3. Exclusions

The ACCC warns: “There are some conditions that consumers can’t predict, including psychiatric care, cardiac conditions and plastic and reconstructive surgery — all of which can be excluded under lower-level policies,” meaning,

When you have a heart attack or need mental health care, you may not be covered.

Risk transferred: potentially tens of thousands of dollars per treatment.

4. Waiting periods

Insurers impose waiting periods before you can claim, typically 12 months for pre-existing conditions. You pay premiums from day one, but can’t claim for a year. During that time, you pay out of pocket.

Risk transferred: full cost of treatment during the waiting period.

Paying for the privilege of paying

You’re a single professional with private health insurance. You pay ~$2,500 per year in premiums. When you go to hospital, you also pay a $750 excess, gap fees, and the full cost of anything excluded.

UTS researcher Nathan Kettlewell put it plainly: “People are paying for insurance, and then they’re paying twice. They’re paying for the privilege of paying.”

Australian private health insurance has become something unique in the insurance world. It doesn’t assess your risk. It doesn’t price based on your risk. And increasingly, it doesn’t bear your risk.

Yet it receives $7.9 billion in government subsidies and generates $2.11 billion in profits. The risk has shifted from insurers bearing full responsibility in 67% of policies in 1997, to just 12.5% today. That’s a massive transfer of financial risk — billions of dollars — from corporations to individuals.

Budget: whopping subsidies, private health profiteering as waiting lists rise

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