In short:

Not-for-profit health fund HCF has agreed to pay the NSW government its full bed rate when its members are given single rooms in public hospitals.

State parliament last week passed legislation allowing the government to raise the levy on private health insurers, in order to claw back lost revenue.

Private Healthcare Australia, the body representing health funds, said increased levies would be passed on to consumers.

The NSW government is claiming a win in its bitter dispute with private health insurers, in the face of an industry advertising campaign that warns of a "health tax" that will "force people out of private health insurance".

Not-for-profit fund HCF has broken rank from the other big insurers and agreed to pay the state government its full bed rate when its members are given single rooms in public hospitals.

Last financial year, the required rate was $892 per night, but HCF paid just $463 per night for that service, according to government data.

While HCF has met the government's demands, for-profit funds — Bupa, Medibank and NIB — are still holding out on paying the required rate.

Last week, state parliament passed legislation allowing the government to raise a levy on all insurers in order to claw back the lost revenue, worth $140 million per year.

The opposition refused to support the legislation, claiming it would amount to a "new health tax".

Private Healthcare Australia, the body representing health funds, called the legislation a "kick in the teeth," claiming it could push up a family's premiums by $156 per year.

Treasurer says insurers should be paying 'their fair share'

NSW Treasurer Daniel Mookhey told ABC News that HCF's decision was a "good step forward" in the campaign to ensure insurers were paying "their fair share".

"It's a good decision by HCF to resume paying their bills," he said.

"It's not the job of a New South Wales taxpayer to subsidise the profits of these big health insurers."

The treasurer said the refusal from other funds to pay was "not good enough".

"No patient could refuse to pay their bills, yet these big four firms have decided that they could."

"Private health patients are receiving less for their coverage today than they were four years ago.

"Already these firms collect more than enough premium to be able to pay their bills and pay benefits for their members as well."

Insurers warn of higher premiums

When the government threatened its legislation, Private Healthcare Australia launched an advertising campaign, accusing the government of trying to fill its "budget black hole" by taxing health funds.

PHA said the increased levies would have to be passed onto consumers.

"In a cost-of-living crisis, this will force more people into the public system, increase pressure on emergency departments and push public patients to the back of what is already the longest surgery queue in the country," the advertisement warned.

When the legislation passed, PHA CEO Rachel David said increased premiums could force 75,000 people to drop their health cover.

Dr David said the decision to "rush a tax through" parliament was "quite cruel" as it would be passed onto those with private health insurance.

"In a cost-of-living crisis, that is far too much for a family to be absorbing at the moment," she said.

"Health insurance funds are federally regulated. The amount they pay for a private patient going into a public hospital is federally regulated, and every single fund in New South Wales pays the legal rate."

Dr David said HCF meeting the government's demands was to "protect its members from a cost impact of a tax rushed through parliament in the middle of a cost-of-living crisis".

"This policy is a kick in the teeth for the millions of people in New South Wales who are contributing to their own healthcare in a cost-of-living crisis," she said.

Dr David added the treasurer's assertion that health funds were making "excess profit" and could "easily absorb" a levy increase was "complete nonsense".

"It's simply a way of raising extra cash to plug a budget blackhole."

Mr Mookhey accused the industry of a "fear campaign", arguing health funds would still require federal approval before hiking rates.

The treasurer hasn't increased the levy yet and is waiting to see whether the remaining big funds follow HCF's lead.

The government said last financial year, NIB only paid $491 per night when its members were given a single room in a public hospital.

Bupa paid $501, while Medibank paid $515.

Many smaller funds, including Teachers' Health, pay the required $892 single-bed rate.

In 2013, then-treasurer Mike Baird introduced similar legislation to force health funds to increase their contributions.