In an attempt to rein-in rising private health insurance premiums, the health minister, Sussan Ley, has announced reforms aimed at cutting the costs of medical devices and prostheses.

The high cost prostheses, which includes devices like pacemakers and replacement hips and knees, are currently being passed on to private patients through rising insurance premiums.

The cost of prostheses to the private system is higher than for public hospitals, as the government mandates a minimum reimbursement private insurers must pay for for devices through its Prostheses List. This list includes most devices and was introduced buy the government to stop insurers picking and choosing which devices to cover.

But reimbursement levels for many devices remain largely unchanged from year to year, despite the cost of producing the devices coming down. Because the Prostheses List reimbursements are fixed, there is also no competition between suppliers to offer cheaper prices to private hospitals purchasing them.

As part of the government’s ongoing review of the private health insurance industry, Ley’s reforms announced on Wednesday include reducing the cost of medical devices as set by the Prostheses List by 10% for cardiac devices and intra-ocular lenses used to treat cataracts or myopia, and by 7.5% for hip and knee replacements.

Ley said the reforms, to take effect 20 February, will cut costs for insurers by $86m in the first year, and total $500m over the next six years, savings which should be passed on to consumers through lower premiums.

Medibank Private CEO Craig Drummond confirmed that the insurer would “return every dollar of these savings to our customers”.

“For our customers this will be reflected in Medibank’s premium submission to the federal government later this year,” Drummond said.

The government is also investigating introducing a more robust and transparent price disclosure model of ongoing, sustainable reductions to the cost of medical devices.

“Consumers made it clear in droves through our online survey that they don’t feel they are getting the best deal from their health funds,” Ley said.

“We have taken action as promised and it’s now time for insurers to deliver on their promise to substantially lower premium increases for their customers next year.”

Currently a pacemaker can cost double the price – or $26,000 more – if it is delivered through the private system rather than the public one, while hip replacements, which cost as little as $4,000 in the public system, costs about $6,000 in private hospitals.

Health economist with the Grattan Institute Stephen Duckett said state health departments, as the single purchasers of prostheses for their hospitals, could open the purchasing of those devices to tender, creating pricing competition.

“There is no single purchaser in the private sector and so each hospital or even surgeon might be buying their own, so the prices drift up and the purchasing power is reduced,” he said.

“I think it’s a good announcment today from Ley that will go some way to addressing that.”

However he said the estimated savings were less than some had predicted from such a move: “But that could be because sometimes the service associated with the prosthesis provided to a private hospital by the supplier is greater than that provided to public hospitals,” Duckett said.

“For example, some suppliers provide a prosthesis technician to be in the operating room at the same time it is being implanted, and that is obviously a cost that might explain why the savings are less than some predicted.”

The Medical Technology Association of Australia said Ley’s reforms were “extremely disappointing” and would have an adverse impact on jobs and services provided by the industry.

“We’ve been, and remain, fully supportive of the government’s efforts to achieve lasting and meaningful, fact-based reform of medical device benefits,” Andrea Kunca, co-lead of the Association, said.

“But 70% of our members with products on the Prostheses List are Australian small-to-medium size companies and a cut of this size will mean job losses, reduced research and development, and loss of manufacturing to overseas.”

But Ian McAuley, a fellow at the Centre for Policy Development who has comprehensively researched the private health sector, said when there was a multitude of insurers in the market, each was weak in the face of prostheses providers.

“The situation is worsened by the moral hazard of doctors knowing that there are private insurance firms able to pay what the service providers demand – either high prices or gold-plated products,” he said.

“The insurers are calling on government to use its purchasing clout.”

He said the situation illustrated his view that the government should eventually introduce a single national insurer, for example through a ramped-up Medicare, because such an insurer would have strengthened purchasing power in the market.

“[It would be] an insurer that is subject to the political discipline of having to justify its spending in terms of its demand on taxes, and that cannot just push up premiums, particularly when they are subsidised by the government,” he said.