Each year, the federal government pays health funds more than $5 billion to subsidise health insurance premiums. It is a significant sum of money, more than one-third of the total amount it pays to the states and territories for all health services and infrastructure.

At $5.4 billion this financial year, rising to $5.91 billion by 2016-17, the money pays for the 30 per cent rebate for most people who take out private health insurance.

The rebate is meant to keep costs down for consumers, but - as evidenced by the 6.2 per cent average increase in premiums announced on Monday - there is precious little evidence the rebate has achieved this in any meaningful way.

The rebate, introduced in 1999, seemed to keep costs down for its first three years, largely due to a pre-election decision of the Howard government in 2001 to keep premiums flat.

The next year, after being re-elected, premiums were raised more than 10 per cent. Since 1998, the average health insurance premium has risen by 130 per cent, while overall prices have gone up by less than 50 per cent.

Much of the problem lies with how the rebate intersects with other measures to encourage people to take out private health insurance. While the rebate is the carrot, it's the stick of a higher Medicare levy for middle- and high-income earners that prompts most people to take up private insurance.

Coupled with lifetime cover provisions - which penalises people over 30 who have not taken out insurance - it is a pretty big stick.

But it provides little incentive for health funds and hospitals to become more efficient.

As the stick encourages more people to join health funds, the cost of health insurance, and the rebate, keeps going up. The rebate is a highly circuitous and inefficient way for the government to invest in healthcare. Private health insurers take their cut in profit for essentially redirecting the funding into health spending.

The introduction of the means test for the rebate highlighted how little it affects health fund membership. Amid predictions from health insurers that there would be a mass exodus of members, numbers have actually increased since it was introduced. The truth is that 12.8 million people are covered by health insurance now, compared with 12.4 million when means testing was introduced.

A serious re-examination of health funding is required, especially with an ageing population. The government must investigate whether the rebate works to reduce health costs to consumers. Or makes little difference over the long-term, but at a whopping cost to taxpayers.