Young adults are leaving private health insurance — why the biggest impact may fall on insurers, not public hospitals
A steady decline, led by younger adults
New private health insurance data for the three months to the end of 2019 show a continued fall in the share of Australians with private hospital cover. Compared with the same period a year earlier, 44,000 fewer people aged 25 to 34 held private health insurance. Over the same timeframe, the overall proportion of the population with some form of private hospital insurance fell by 0.7 percentage points, to 44.0%.
That headline figure matters for the industry, but the composition of who is insured matters just as much. While younger adults are leaving, there are 60,000 more people aged 70 and older with private cover than a year ago. The average age of a person with private health insurance is therefore continuing to rise.
This shift—fewer younger members and more older members—has different consequences for different groups: people who hold policies, the insurers who collect premiums, and the public hospital system that provides care regardless of insurance status.
Why the age mix matters: the risk pool problem
Private health insurance relies on pooling risk. In broad terms, younger people tend to use hospital care less than older people. When younger members drop out, the “risk pool” worsens, because a larger share of the remaining insured population is likely to have higher health-care needs.
As the risk pool deteriorates, the cost of providing benefits rises relative to the premium base. That dynamic can push premiums up for everyone. Higher premiums, in turn, make private cover even less attractive to people who expect to use hospitals infrequently—often younger adults—prompting more of them to leave. This feedback loop is frequently described as a “death spiral” for the industry.
The immediate losers in that scenario are straightforward:
Insurers lose premium revenue as fewer people pay into the system.
Remaining members face higher premiums if the pool becomes older and more expensive to insure.
In other words, a youth exodus is directly damaging to insurers’ business model and to the affordability of cover for those who stay.
Does a fall in private cover automatically mean more pressure on public hospitals?
A central question is what happens to demand for public hospital care as private coverage declines. The private health insurance industry has argued that if young people leave, public hospitals will face massive additional pressure. But that claim does not necessarily follow from the data and the way private insurance works in practice.
The people most likely to drop out are younger people and people who do not expect to use hospitals much. Logically, if those leaving are less likely to need hospital care in the first place, only a small number of hospital admissions would be expected to shift from the private to the public system.
That is a crucial distinction: a fall in the number of insured people does not automatically translate into a proportional rise in public hospital demand. The impact depends on who is leaving and what services their policies would have covered if they needed care.
Not all private health insurance is the same
Private hospital insurance products are now differentiated into Gold, Silver, Bronze, and Basic tiers, with “+” designations on the last three. Public debate often focuses on how many people have private insurance, but the level of cover can change the real-world effect on the health system.
Among those insured, about 41% have cover with “no exclusions,” which is described as equivalent to Gold. That means less than 20% of the total population has insurance coverage for all conditions.
This matters because many people who hold private insurance—particularly those on lower tiers—already rely on the public system for procedures not covered by their policy. If someone’s policy excludes particular services, their insurance status does not guarantee they would use the private system for those services. They may still depend on public hospitals for excluded care.
Why downgrading and exclusions change the public-hospital story
When premiums rise, people do not always respond by cancelling their policy. Research has found that consumers are relatively slow to respond to changes in the price of insurance. Private health insurance is often described as “sticky”: once insured, people—especially older people—tend to stay insured.
Instead of dropping out entirely, many respond to premium increases by downgrading their cover. This can happen in two main ways:
Reducing what is covered, such as moving from Gold to Silver.
Increasing the excess they must pay if they go to hospital.
Importantly, taking on a higher excess is unlikely to make a person choose a public hospital instead of a private one. Meanwhile, downgrading to a policy with exclusions can mean a person is already positioned to use the public system for certain treatments, regardless of whether they remain “insured” on paper.
Examples: maternity care and joint replacements
Two examples illustrate why changes in insurance participation—especially among people with lower-tier products—may not translate into a large shift in public hospital demand.
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 fewer people hold those lower-tier products, that reduction would have no impact on demand for maternity care in public hospitals, because those policies typically did not cover private maternity care in the first place.
Joint replacements, such as hips and knees, are also normally covered only in Gold products. The same logic applies: if a person’s policy does not cover the service, their holding of private insurance does not necessarily reduce public hospital demand for that service.
These examples do not prove there is no effect at all from declining private cover. They do show why the effect can be smaller than suggested by arguments that treat all private insurance as equally comprehensive.
Who is leaving: the “new to insurance” cohort
The biggest changes in dropping out are occurring among young people—those who are new to private health insurance and have not established a long history with it. Older people, by contrast, tend to remain insured and are more likely to adjust their policies rather than cancel outright.
This pattern matters for system-wide demand because young people use health care infrequently. If the group leaving is less likely to be admitted to hospital, then only a small number of admissions would be expected to move from private to public hospitals.
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 over the next ten years, while people under 70 will drop out, with those under 55 dropping out more rapidly.
A slow spiral still poses serious challenges. Even gradual changes can compound over time: as the insured population ages, premiums can rise, and affordability pressures can intensify for those who remain. But the same modelling and logic also underline why the public hospital system may not face an immediate surge in demand simply because younger adults are leaving private cover.
Why younger people see private cover as 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 a young person pays is essentially the same as the premium everyone else pays, even though young people’s expected use of health care is typically much lower.
As a result, the premium paid by many younger members is much greater than the costs of their expected use of health care. The gap between what they pay and the expected benefit is described as getting worse, which helps explain why younger people are dropping their cover in large numbers.
What this means for insurers, members, and the public system
The decline in private health insurance participation—particularly among 25 to 34 year olds—creates clear financial and structural problems for insurers. With fewer young, low-claim members paying premiums, the risk pool becomes less favourable. That tends to push premiums higher, which can accelerate further departures and increase the burden on those who remain insured.
For public hospitals, the picture is more nuanced than industry talking points often suggest. If those leaving are younger and less likely to use hospital care, and if many lower-tier policies already exclude major services (meaning people would use the public system for those services anyway), the direct increase in public hospital demand may be limited.
Ultimately, changes in private health insurance are not just about how many people are insured. They are also about who is insured, what their policies cover, and how people respond to rising premiums—by cancelling, downgrading, or increasing their excess. The data to the end of 2019 point to an industry under strain, with the most immediate and significant consequences falling on insurers and on the affordability of cover for those who stay.
Key takeaways
Regulator data to the end of 2019 show 44,000 fewer insured people aged 25 to 34 than a year earlier, and overall private hospital cover at 44.0% of the population.
The insured population is aging, with 60,000 more people aged 70+ insured than a year earlier.
As younger people leave, the risk pool worsens, premiums can rise, and insurers face a slow-moving “death spiral.”
Claims that a youth exodus will massively increase pressure on public hospitals do not necessarily hold, because those leaving are less likely to use hospital care and many lower-tier products already exclude key services.
Debates that focus only on the number of insured people can miss the importance of coverage tiers (Gold, Silver, Bronze, Basic) and exclusions.