NIB's chief executive Mark Fitzgibbon rejected the AMA's proposal as "paternalistic" and an attack on consumer choice.
"All policies do have a minimum level of cover, it's just a question of where you draw the minimum," he said.
"It's an interesting argument, isn't it, to say that consumers can't make a decision for themselves. It sounds a bit paternalistic."
Instead, Mr Fitzgibbon shifted the onus back onto consumers to check that their health insurance policy covered the treatments they thought they might need.
"We took the view, so long as it's transparent, caveat emptor [the legal principle of buyer beware] applies," he said.
The NIB boss said his company was a pioneer in offering flexible insurance policies with differing levels of cover, with many of the lower cost (although still between $1,500-2000 a year for a couple) policies specifically targeted at younger, healthier people.
"It's been wonderfully successful in attracting more and more younger people into the system, because allowing younger people to carve out cover such as obstetrics or orthodontics ... allowed us to reduce the price," he said.
Is health insurance worth it?
Last year, consumer advocacy group Choice published a list of seven popular "junk" health insurance policies, which it described as a "waste of money for consumers and taxpayers".
NIB's basic hospital policy was on that list, along with some policies from major rival Medibank Private, HCF, Australian Unity, Defence Health and HIF.
"Our analysis shows that in many cases, junk policies cover less than 1 per cent of the services available in hospital, and exclude treatment for the most common serious illnesses such as cancer, stroke and heart disease," Choice spokesman Tom Godfrey said at the time.