The Rudd government denies its planned budget changes to the Medicare levy surcharge will drive up private health insurance premiums.

It has urged private health funds to make their products attractive enough to retain consumers.

The government has announced it intends to lift the surcharge threshold, which applies to taxpayers who do not have private patient hospital cover, from $50,000 to $100,000 for singles and from $100,000 to $150,000 for couples.

The surcharge is calculated at the rate of one per cent of taxable income.

Private health insurance advocates, the Australian Medical Association (AMA) and the opposition argue the changes will spark a mass exodus from funds and increase premiums by up to 11 per cent.

But Health Minister Nicola Roxon warned funds not to use the changes as an excuse to lift premiums.

"I don't think the industry can use every change and every reason for a (premium) increase," she told ABC Radio.

"Sometimes they have to look at what actually might keep their cost structures down."

Treasurer Wayne Swan says the changes will benefit millions of Australians who are currently being taxed unfairly.

"I think we have made a very important decision when it comes to the Medicare surcharge levy," he told reporters in Canberra.

"Up to two million people have been caught in a tax trap.

"We have removed that tax trap. I think it is a fair thing to do and it is a very fair decision."

Former Howard government health minister Tony Abbott says the changes will be the first step in the Rudd government's plan to dismantle private health insurance.

"Pre-election, people like myself often said that the Labor party had an ideological hatred of private health insurance," he told reporters in Canberra.

"This is the first step in Labor's dismantling of the private health insurance system that has served this country well."

The AMA says the changes will cause a flood of people to clog up the public health system, lengthening waiting times for elective surgery.

"Anything that gives a signal to Australians that they can and should drop their private health insurance, or should not take up private health insurance, means they automatically fall into the public sector if they need health care," president Rosanna Capolingua told ABC Radio.

"The public sector cannot afford that burden."

The Australian Health Insurance Association says research it conducted last year suggested an increase in the surcharge threshold would encourage 400,000 people to abandon private health funds.

"There have been a number of interest rate rises and so on since then so, in fact, people might even be more inclined to get away from private health insurance," chief executive Michael Armitage told Fairfax Radio Network.

"Every person who waits in a queue can blame the federal government and every person whose premiums go up next year can blame the federal government."

However, the Australian Private Hospitals Association (APHA) has said the community will see that access to quality care in the private sector outweighs the small financial benefit of dropping the cost of health insurance.

"We believe that despite the changes announced in the budget, when people sit down and evaluate the value proposition, they will decide the benefits provided by private health care outweigh any small financial saving that may accrue," APHA executive director Michael Roff said.

The Doctors Reform Society has said the surcharge was unfair and had failed to do what it was supposed to when imposed in 1997.

"It has failed to put downward pressure on premiums, and failed dismally to help correct the appalling waiting times for elective surgery in public hospitals.

"It is so unfair on working families and on the 56 per cent of Australians who cannot afford PHI."

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