The government’s refusal to allow health insurance companies to offer different premiums to different people is hurting Australian health.

The spectre of “managed care” — where insurers determine what medical procedures are eligible for private coverage — has hung over the sector for decades. When the private health sector was dominated by mutual, not-for-profit health funds, the principle of health professionals determining what was appropriate care for a person was held as sacrosanct, an inviolable aspect of the doctor/patient relationship. But health is not a commodity market — the consumption and funding of healthcare has deep societal and moral implications that need to be balanced with commercial drivers.

Less than half the population has private hospital insurance. While federal Health Minister Tanya Plibersek makes much of the fact that participation has remained stable despite her government cutting the private health insurance rebate, the reality is the range of hospital services covered by private health insurance is reducing as insurers seek to offer lower-priced products by excluding certain types of treatment (cardiac procedures and treatment for a range of conditions typically required by older aged people, for example). The theory is that at certain life stages people don’t require this type of coverage. True, but it fundamentally contradicts the principles of community rating that underpin how private healthcare funding is intended to operate.

The growth of these “exclusionary” products — there have been more than 500,000 new exclusionary policies in the last three years — means as the population ages and becomes more susceptible to health problems, the value of private cover will be further eroded.

The private health insurance sector has become dominated by Medibank Private and BUPA — the Coles and Woolworths of the health industry — which control almost 60% of the market. In an industry where government controls premium rates, it’s clear these insurers need to reduce health costs to maintain financial return objectives. BUPA and Medibank collectively have the market power to start dictating what health services they will and will not cover; it’s not a stretch to imagine them dictating (metaphorically) what products they will stack on their shelves and what price they will pay for them, offering their own branded products in competition with other suppliers — with the aim of maximising profits and stifling competition.

On one hand we have commentators highlighting the move of certain insurers to disqualify some procedures from coverage, while on the other insurers are openly promoting insurance products where consumers are forced to elect to exclude specified procedures in order to get a lower premium.

Neither of these augurs well for health consumers in the long run. An unhealthy mix of wayward government policy settings and commercial self-interests threatens to send our already out-of-balance health system into further chaos. At the end of the day it is consumers who will be faced with higher gap payments and further disincentive to privately insure.

The answer is to make private health insurance more attractive by: 1) legislating to enable funds to cover “out-of-pocket” expenses; 2) allowing funds to offer incentives to people who choose not to engage in high-risk behaviours, or who seek to improve their health status.

Being able to offer non-smokers a better health insurance deal should be an easy win. Indeed, our firm would love to be able to provide non-smokers with a lower premium. This might even provide an important new incentive for smokers who are thinking of quitting. And it would drive another important outcome — encouraging more healthy people into the insured pool, spreading the risk and cost across a larger premium pool, allowing premiums for all to be reduced in the long term.

But national policy on preventive health is strangely at odds with the legislation that prevents individual funds improving the attractiveness of private cover.