Young Australians are leaving private health insurance — and the biggest shock is to insurers, not public hospitals

A continuing decline in private hospital cover

New private health insurance figures for the three months to the end of 2019 indicate Australia’s private hospital insurance coverage is still trending down. Compared with the same period a year earlier, 44,000 fewer young adults aged 25 to 34 held private health insurance. At the same time, the overall share of the population with some form of private hospital insurance fell by 0.7 percentage points compared with the December quarter of 2018, to 44.0%.

Those headline numbers matter because private health insurance is not just a consumer product; it is also a financing mechanism that depends on a broad base of contributors. When participation falls, the consequences ripple through premiums, product design, and the mix of people who remain insured.

The private health insurance industry argues that a “youth exodus” will translate into major additional pressure on public hospitals. But the available information suggests that claim does not necessarily follow from the pattern of who is leaving, what kind of cover many people hold, and how insured consumers tend to behave when premiums rise.

Who is leaving — and who is staying

The latest data point to a clear shift in the composition of the insured population. While the number of young people with private cover fell, there were 60,000 more people aged 70 and older than a year earlier. The average age of a person with private health insurance continues to creep upwards.

This is not a minor detail. Changes in the mix of members affect different stakeholders in different ways:

• Insured members may face higher premiums if the pool becomes older and more expensive on average.
• Insurers can lose premium revenue as participation declines, while also taking on a higher-cost membership base.
• The public hospital system may be affected if substantial numbers of people who would otherwise have used private hospitals instead shift to public care.

The crucial question is whether the current pattern of dropouts is likely to create a large and immediate increase in public hospital demand. Based on the characteristics of those most likely to leave private cover, a large surge is not the most logical expectation.

Why younger members matter to insurers: the risk pool problem

Private health insurance relies on a “risk pool”: a mix of people who pay premiums, some of whom will use a lot of care and some of whom will use little. Younger people typically use health care less than older people. When younger members drop out, the risk pool worsens, because the remaining insured group is, on average, more likely to claim.

That dynamic can push premiums higher for everyone. Higher premiums, in turn, can encourage still more younger members to leave. This feedback loop is often described as a “death spiral” for the industry: fewer low-claim members remain to balance the pool, average costs rise, premiums rise, and participation falls further.

In this scenario, the immediate losses are concentrated in two places:

• Insurers lose out because fewer people are paying premiums.
• Remaining members lose out because premiums rise as the pool becomes less balanced.

From the industry’s perspective, the departure of younger adults is especially damaging because it undermines the long-term viability of the pool, not just the current year’s revenue.

The public hospital claim: why it may be overstated

The argument that young people dropping private cover will “put massive amounts of additional pressure on public hospitals” sounds plausible at first glance: fewer insured people might mean more people turning to public hospitals. But the likely impact depends on who is leaving and what services they would have used.

The people most likely to drop out are younger and are less likely to expect hospital use. If they are not frequent users of hospital care, then only a small number of admissions would be expected to shift from the private to the public system. In other words, a fall in private coverage does not automatically translate into a proportional rise in public hospital demand.

There is also another practical complication: having private health insurance does not necessarily mean having comprehensive cover for all conditions. Many insured people already rely on the public system for procedures not included in their policy.

Why the level of cover matters as much as the number of people insured

Private health insurance products are differentiated into Gold, Silver, Bronze, and Basic tiers, with “+” designations on the last three. Public debate often focuses on the number of people insured, but the level of cover is critical for understanding how changes in membership might affect public hospitals.

Among those who are insured, about 41% have coverage with “no exclusions”, described as the equivalent of Gold. That means less than 20% of the total population has insurance coverage for all conditions.

This matters because it implies a substantial share of people who hold private health insurance do not have full cover. They may already depend on the public system for services excluded under their policy. So, if some of these members drop their cover, it does not necessarily create a new burden for public hospitals for excluded services—because those services were not being funded through their private policy in the first place.

Examples: maternity care and joint replacements

Two common examples illustrate why the link between declining private cover and public hospital demand can be weaker than claimed.

• Maternity care is usually only covered at the Gold tier. People with Silver, Bronze, or Basic products were therefore presumably always going to have their baby in a public hospital. If membership falls among people holding those lower-tier products, it would have no impact on demand for maternity care in public hospitals.
• Joint replacements such as hips and knees are also normally covered only in Gold products. The same logic applies: for people without Gold-level coverage, these procedures may not have been privately covered anyway.

These examples do not prove there is no impact on public hospitals. They do show why the impact cannot be inferred simply from the number of people dropping private cover. The product tier, and what is actually covered, changes the picture.

What research suggests about consumer behaviour: “sticky” insurance

There has been extensive research aimed at predicting what happens to public hospital demand when private insurance participation declines. One key finding is that consumers are relatively slow to respond to changes in the price of insurance. Private health insurance is often described as “sticky”.

In practice, once people are insured—especially older people—they tend to stay insured. When premiums increase, many respond not by dropping cover entirely, but by downgrading. That can mean moving from Gold to Silver, for example, or taking on a higher excess payable if they go to hospital.

Importantly, a higher excess is unlikely to make people choose a public hospital. This suggests that premium pressure may lead to changes in the type of cover people hold rather than a large immediate shift from private to public hospital use.

The largest changes in terms of dropping out are occurring among younger people who are newer to private health insurance and have not established a long history with it. This aligns with the idea that “stickiness” is stronger among older members and weaker among younger members.

A slow-moving “death spiral”, not an overnight collapse

Modelling described by the Grattan Institute suggests the “death spiral” dynamic is real but slow. The expectation is that people over 70 will probably still be insured at much the same rate they are now over the next ten years. But people under 70 are expected to drop out, with people under 55 dropping out more rapidly.

This projected pattern reinforces two points at once. First, it highlights why insurers face a structural challenge: the membership base is ageing, and younger cohorts are less willing to join or stay. Second, it indicates why the public hospital system may not experience a sudden shock solely from younger people leaving, because the older cohorts—who tend to use more care—are expected to remain insured at similar rates for some time.

Why young people see poor value

One reason younger adults are leaving is that they receive a bad deal from private health insurance under Australia’s system of “community rating”. Under community rating, the premium paid by young people is essentially the same as the premium everyone else pays, even though young people’s expected use of health care is typically lower.

That means the premium a young person pays is much greater than the costs of their expected use of health care. The gap between what they pay and the expected benefit is getting worse, which helps explain why younger members are leaving in large numbers.

This is a central tension in the system: the industry needs younger, lower-claim members to maintain a balanced pool, but those members are also the ones most likely to feel they are paying more than they get back in value.

What the trend means for insurers, members, and public hospitals

Taking the data and behavioural patterns together, the decline in private health insurance coverage appears to be a bigger problem for private insurers than it will be for the public health system—at least in the way the industry often frames it.

For insurers, fewer young members worsens the risk pool and threatens a cycle of rising premiums and further dropouts. For members who remain, the likely consequence is higher premiums and continued pressure to downgrade cover or accept higher excesses.

For public hospitals, the impact depends on which groups drop out and what services they would have used privately. Because the largest dropouts are younger people who use hospital care infrequently, and because many insured people do not have comprehensive cover for all conditions, the immediate increase in public hospital demand is not necessarily large.

Key takeaways

• Regulator data to the end of 2019 show 44,000 fewer insured people aged 25–34 than a year earlier, and overall private hospital cover at 44.0% of the population.
• The insured population is ageing, with 60,000 more people aged 70 and older than a year ago.
• As young people leave, the risk pool worsens, pushing premiums higher and creating a slow-moving “death spiral” risk for insurers.
• Public hospital pressure is not automatically proportional to falling private coverage, because those most likely to drop out are younger and use hospital care less.
• Product tiers matter: only about 41% of insured people have “no exclusions” (Gold-equivalent), meaning less than 20% of the total population has cover for all conditions.
• Insurance is “sticky”, particularly for older people, who often respond to premium increases by downgrading cover or increasing excess rather than dropping out entirely.

The overall picture is of a private insurance sector facing a structural participation challenge, driven most sharply by younger adults. While public hospitals remain a vital part of the system and will always be sensitive to broad shifts in health financing, the current membership changes appear more immediately destabilising for insurers and for those who continue to pay premiums than for public hospital demand.