'A very grim picture' without further change

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Defence Health says it returned $0.97 in member benefits for every $1 of premium in 2016-17.

Releasing its annual report, the organisation said this compared well to an industry average of $0.86, complementing its low management expenses of 6.4 per cent of premium revenue.

In a letter to members, CEO Gerard Fogarty described the recent decline in the number of Australians with private health insurance as "an extremely serious issue for our health system."

"Private health insurers currently pay for almost two thirds of all elective surgery in Australia. Significant changes in the participation rate will place a further burden on an already challenged public system," he said.

Mr Fogarty said data from the Australian Prudential Regulation Authority shows for the first time the majority of people taking out health insurance are over 65. "At the same time, people younger than 35 are leaving private health insurance."

"This paints a very grim picture," he said. "A top-heavy sector of older, unhealthier people is unsustainable."

Mr Fogarty backed recent reforms announced by health minister Greg Hunt, including to the pricing of prostheses, but argues more needs to be done on that issue, as well as states and territories pushing people to use their private health insurance in public hospitals.

Defence Health confirmed its membership went against the industry trend in 2016-17, rising by 9.1 per cent, while benefit outlays rose 16.3 per cent to $455.1 million.