"Private health insurance premiums are becoming less affordable for everyday Australians," the association's president Danielle McMullen told reporters on Friday.
"We're seeing Australians drop their cover down to lower rates of health insurance cover, or in fact dropping their private health insurance altogether."
The trend has put increased pressure on the nation's already-stretched public hospital system while private hospitals simultaneously grapple with significant post-COVID-19 pandemic cost inflation.
"Fewer policies now offer top-level coverage, exclusions are at record levels, and the overall value of private health insurance is eroding," Dr McMullen said.
Almost 70 per cent of hospital policies contain exclusions - the specific treatments or conditions an insurer will not cover.
Many hospitals are also warning their existing contracts with insurers no longer cover the cost of care.
"This combination of rising costs, shrinking coverage, and mounting financial pressure is placing the entire private health system under strain," Dr McMullen said.
The association wants the government to mandate insurance companies pay at least 90 per cent of the premiums collected back to consumers in the form of benefits.
It is also calling for independent oversight of the system through a private health system authority - a request Private Healthcare Australia, the peak body for health insurers, says is not realistic.
Federal Health Minister Mark Butler said the report was a wake-up call to insurers, many of which he acknowledged were recording big increases in profits.
In 2024/25, insurers returned 84.2 per cent of premiums to consumers as benefits - well below the 2019 level of 88 per cent.
Pressed on whether the government could pass a law to force insurers to give Australians more back of their premiums, Mr Butler said he would be increasing the pressure.
"I said if it didn't jump to a level I thought was appropriate, I would look at legal options to force it," he told ABC Radio.
Dr McMullen said shady tactics such as product phoenixing and confusing tiered product systems required independent oversight.
The "increasingly common" practice of phoenixing involves using a loophole by closing an existing policy and then "phoenixing" it back as a very similar product, but with a much higher price.
"This tactic bypasses the regulated premium-increase approval process, allowing insurers to raise costs without ministerial oversight and leaving consumers, especially those seeking top-tier hospital cover, paying more," she said.
The growth of private health insurance premiums has outstripped inflation, average weekly earnings and the indexation of the Medicare Benefits Schedule, the medical association report reveals.
Between 2008 and 2024, premiums climbed more than 100 per cent, while MBS indexation increased by less than 20 per cent.
But Dr Rachel David, CEO of Private Healthcare Australia, the peak body for health insurers, said the average health insurance premium rise had been less than the rate of health inflation for each of the past four years, disputing the association's claims.
Dr David said rising payments for hospital care and increasing specialist doctor fees meant health insurers were paying out more for patient care than ever before.
"A claims ratio of 90 per cent would send some health funds broke ... it will only reduce competition in the sector, which affects prices," she told AAP.
33°C