Australia’s health system is unfair and muddled and the prescription for its repair depends on the federal government’s approach to private health insurance.

In a paper on private cover, Grattan Institute analysts Dr Stephen Duckett and Kristina Nemet warn the sector faces a death spiral if young, healthy people continue to drop their cover.

An “unhappy mix” of partially public and partially privatised health care in Australia has led to a system “riddled with inconsistencies and perverse incentives”, the paper released on Tuesday says.

A new framework is needed but the government must decide whether the purpose of the private system is to complement or substitute for the public one, before considering if further subsidies are the best solution to save the health insurance industry.

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

If private health was meant to be complementary – offering “add-ons” or services not available under universal public health – then the argument for increasing public subsidies was weak.

More than half of all Australians have private health insurance that covers services not taken in by Medicare, including dental, optical and allied health services such as physiotherapy.

“If government is not prepared to provide those additional services universally, it is illogical to subsidise for a subset of the population through (insurance), especially when that subset is not the most disadvantaged in the community,” the Grattan paper argues.

But if private insurance was to be a substitute for the public system, offering faster care to those who can afford it, then the argument for increasing subsidies was strong – as long as the private system can show it’s cost-effective.

However, Dr Duckett and Ms Nemet say it’s hard to compare the efficiency of the two sectors given previous studies have contesting findings.

But they conclude that, overall, it’s unlikely taxpayer subsidies of private health insurance reduced the total spending on health.

“Ultimately, the final judgement about the value of subsidies for PHI will involve balancing the net benefit relative to the net costs, both to government and society, taking into account who pays, the role of government, and the value placed on the complementary role of private care,” the analysts said.

The Consumers Health Forum wants a Productivity Commission inquiry into the role of private health insurance in the Australian health system.

“There are suggestions that private cover facilitates ‘queue jumping’, providing access to care in public hospitals based on insurance status rather than patient need,” CEO Leanne Wells said,

“Australians must ask whether we want to live with such a broken system.”