Not-for-profit health funds HCF and HBF have scotched their plans to merge, saying as details were nutted out it became clear joining forces would not have been in their members' best interests.

The pair announced in February their aim to merge by August and signed a heads of agreement for the $4 billion deal, which would have seen them become Australia's third largest health insurance provider, behind Bupa and Medibank.

But the talks have collapsed, with HCF and HBF (which dominates the Western Australia market) saying the merger would not be in the best interests of their members.

"While we share common ground with HBF as member focused, not-for-profit health funds, the timing for the proposed merger is not right," HCF's managing director Sheena Jack said.

The merged entity would have counted 2.5 million people as members. At the time of the original announcement, they said the merger was a logical fit, given their not-for-profit structure and "member-first approach".