Private health insurance (PHI) makes Australia’s health system unfair and muddled says report.

The study by Grattan Institute analysts Dr Stephen Duckett and Kristina Nemet warns that the PHI sector faces a death spiral if young, healthy people continue to drop their cover.

An “unhappy mix” of partially public and partially privatised healthcare in Australia had led to a system “riddled with inconsistencies and perverse incentives”, the paper said.

Prof Duckett said Australians under 65 were reducing their coverage. Among young people, about 3-5 per cent were dropping out each year.

“Which means the risk pool, the money that everybody pools, is getting worse in the sense that younger people are paying more now and getting less,” he told the ABC.

Taxpayer subsidies total around $9 billion a year, including $6 billion for the PHI rebate and $3 billion for inpatient private medical services.

The report argues that a new framework was needed but the government must decide whether the purpose of the private system was to complement or substitute for the public one, before considering if further subsidies were the best solution to save the health insurance industry.

Duckett and Nemet said it was hard to compare the efficiency of the two sectors given previous studies have contesting findings.

But they concluded that, overall, it was unlikely taxpayer subsidies of PHI reduced the total spending on health.