But the industry has in turn accused the state of trying to roll out a "health tax" on policyholders to shore up an ailing hospital system.
Some insurers were contributing just $474 per day to the average $1075 daily cost of a hospital bed, despite NSW Health already charging below cost at $892 per day, the government said.
Most private health insurers paid their fair share, but some large providers profiteered from the system, it said.
NSW Treasurer Daniel Mookhey said private insurers were "robbing" the public system of critical funds.
Treasurer Daniel Mookhey has praised smaller insurers. (Dean Lewins/AAP PHOTOS)
"I commend those smaller and not-for-profit insurers who are doing the right thing," Mr Mookhey said in a statement on Monday.
Health Minister Ryan Park said private insurers shifting costs to taxpayers was a "burden our health system can no longer shoulder".
"We're seeing some of the largest for-profit insurers, who enjoy billions of dollars in profit each year, sticking taxpayers with the tab," he said.
In June, the government warned of stronger action if it failed to get a breakthrough with private health funds on the issue following withdrawals from a 2013 deal for them to pay more for hospital stays.
The state budget included a note that a move to ensure private health insurers paid "correct room rates to public hospitals" would raise $490 million over the four years to 2027/28.
An industry group says NSW is trying to slug private health insurance holders with a tax. (Paul Braven/AAP PHOTOS)
Private Healthcare Australia, an industry group, said most insurers paid a mandated federal rate for single rooms but NSW wanted a higher "preferred rate" to meet the budget revenue target.
The health funds currently paying the NSW preferred rate represented about 10 per cent of the state market, it said.
Chief executive Rachel David said members of big funds, including HCF, would be forced to pay more under a higher private-insurer contribution on rooms.
Some health insurance premiums could go up by $114 per year if changes were made, leading to thousands dropping out of the private system, she said.
Dr David described the push as a "secret plan to legislate a health tax".
"We understand the NSW government is under significant budget pressure, but imposing a tax on people working hard to contribute to their own healthcare is not the solution," she said.
Opposition health spokeswoman Kellie Sloane said the problem was a lack of effective negotiation between state and federal governments on health funding.
"Instead (premier) Chris Minns is considering a health tax, which may end up hurting four million NSW families in the middle of a cost-of-living crisis," she said.
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