Private health insurers are being accused of misleading members about using their policies in public hospitals.

But insurers and private hospitals say cash-starved public hospitals, which are reaping more than $1 billion a year from the industry, are aggressively coercing patients into using their insurance.

The Victorian Healthcare Association, a group that represents public hospitals, has asked the Commonwealth Ombudsman to investigate several insurers for allegedly misleading members about the consequences of using their insurance in a public hospital where patients are otherwise treated for free.

The group says that in November Australian Unity wrote to members directing them not to use their insurance in a public hospital. The letter, seen by Fairfax Media, says under a policy change, members will only be covered up to the cost of a shared room in a public hospital from December 13 and that any additional cost for accommodation will have to be covered by the patient.

“If you choose to be a public patient in a public hospital, you are entitled to treatment without using your cover. Doing so ensures no out of pocket costs,” the letter says.

The letter say that insurance premiums are rising because public hospitals are asking patients to use their insurance “even though there is no clear clinical benefit”. It also says that in recent years, the Victorian and NSW governments had advised public hospitals to increase their accommodation fees, contributing to increased pressure on premiums.

“Australian Unity suggests that, unless there is clear benefit to you using your private health insurance when you are in a public hospital, that you reserve your right not to use it. This is particularly so if you will be left out of pocket, but even if not, you will be doing your small bit to curb the premium increases that have been running ahead of inflation for years,” the letter said.

The VHA also complained about a Defence Health newsletter sent to members last year, which said patients may face costs and that the practice puts pressure “on your future premiums”.

CEO of the VHA, Tom Symondson?, said the letters were “outrageous” because he does not know of any Victorian public hospitals that allow patients to face out of pocket fees if they use their insurance. He said if public hospitals treat “private patients” they get paid by the insurer, freeing up their government funding to treat other patients.

Mr Symondson said the letters would make many members frightened of using their insurance and that he was particularly worried about people in rural and regional areas who may not have a private hospital near their home. If these people want to choose their own specialist doctor, they often do this by using their insurance in a public hospital.

“They [the insurers] are sowing seeds of uncertainty for people at their most vulnerable point,” he said.

But CEO of Defence Health Gerard Fogarty defended his newsletter, saying one in four of his members faced out of pocket costs averaging $300 last year when they used their insurance in Victorian public hospitals. In NSW, he said 57 per cent of members who chose to be private patients in public hospitals faced an average out of pocket cost of $525.

A spokesman for Australian Unity, Andrew Scannell, said the company stood by its communication to members.

The Australian Prudential Regulation Authority says public hospitals were paid more than $1 billion by insurers last year.

Under the National Health Agreement which sets out the conditions of hospital funding, hospital employees are not allowed to direct patients or their legal guardians towards a particular choice about using their health insurance in a public hospital.

The document also says hospitals must “provide all Australians with timely access to quality health services based on their needs, not ability to pay, regardless of where they live in the country”.

Mr Symondson said if patients are treated as “public patients” in a public hospital, their care is covered mostly by the state government (about 60 per cent) and the remainder by the federal government, which contributes about 40 per cent towards acute hospital care in the states and territories.

If patients choose to use their insurance, he said, Medicare pays 75 per cent of the doctors’ fees, with the remaining costs split between the insurer and potentially patients if they have to pay to cover any gaps, such as an excess for using their insurance. However, Mr Symondson said he believed public hospitals generally offered to pay any gap fees the patient would face.