Junk insurance - policies that don't cover treatment for almost all illnesses, including heart attack, stroke and cancer, or that only allow the policyholder to be treated as a private patient in a public hospital - attracts billions in government subsidies.

But these policies, often marketed to young people as the "no-frills" option, were barely worth the paper they were written on, CHOICE told the Senate inquiry into the value and affordability of private health insurance and out-of-pocket costs.

The organisation called for the government to stop providing private health insurance subsidies for the next-to-useless policies or exempt high-income consumers from paying the Medicare levy surcharge.

"With more than $6 billion of taxpayer funds being spent on health insurance rebates, it's essential that this money is used to reduce the strain on the public health system and not on policies that are unlikely to cover consumers when it counts," CHOICE spokeswoman Nicky Breen said.

"These policies are not only poor value for consumers, but are poor value for the Australian community, who subsidise junk policies that do not reduce the strain on the public healthcare system," the organisation wrote in it submission to the inquiry on Monday.

Holders of these policies face significant "bill-shock" when they discover their treatment is not covered by their policy, CHOICE said.

Junk policies accounted for roughly 13 per cent of all hospital and combined policies on the market, and covered less than 1 per cent of hospital treatments and services, the submission said.

They typically covered a tiny number of procedures, including accidents, wisdom teeth, appendix surgery and knee arthroscopies and reconstructions but excluded all other services and illnesses.

Consumers were attracted to the policies knowing they wouldn't use them but did so for tax breaks, or wanted the cheapest policy possible and didn't realised they bought a dud policy with little value, the submission said.

CHOICE argued that if the policies were not eligible for a rebate consumers would not be drawn to inadvertently buy such cover and incur significant out-of-pocket costs.

"With a growing number of consumers concerned by the cost of healthcare, it is reasonable that [they] would seek out the lowest cost coverage possible ??? junk policies are not always the cheapest policies available on the market, and it can be difficult for a consumer to identify if the policy provides real value," the submission said.

In July CHOICE urged the government to simplify health insurance policies after its survey found 44 per cent of policyholders found it difficult to compare policies.

"It's vital that the federal government help consumers better understand what they're buying so they don't fall into the trap of purchasing policies that are barely worth the paper they're printed on," Ms Breen said.