The Abbott government will cut nearly $2 billion from the health system over the next five years, while pushing ahead with controversial changes to the way it funds state-run public hospitals.

After angering voters last year with proposals for a Medicare co-payment, Health Minister Sussan Ley has looked for savings from a range of little-known programs, including grants for preventative health research, chronic disease prevention and rural outreach.

Ms Ley says the budget still represents a "sensible and moderate" increase in funding – to more than $69 billion next financial year. Health spending is projected to increase by 5.9 per cent in real terms over the next four years.

The government is proceeding cautiously on Medicare reform, allocating $34 million to support the work of taskforces which will examine elements of the system and present reform blueprints to the government by the end of the year.

But it has not retreated on its plans to cease funding hospitals based on the services they provide and shift to a new model based on population growth and inflation, which will leave states and territories $57 billion worse off over 10 years.

The Australian Medical Association has said this "will fall well short of the funding needed to position public hospitals to meet the increasing demand", locking them in to having inadequate capacity to give people the treatment they need.

Patients will welcome $1.6 billion in new drug listings, including medicines for melanoma and bowel cancer.

A number of services will be added to Medicare, including a new treatment for early-stage breast cancer, while a new cervical cancer test will mean women will only need to get a pap smear every five years instead of every two.

A scheme created by the former Labor government to pay living organ donors the minimum wage while they recover from surgery will be extended from six to nine weeks. This is part of a $10 million push to improve organ and tissue donation rates, which also includes allowing people to register their consent online to donate their organs.

The budget papers restate the government's commitment  to set up a Medical Research Future Fund, which was first announced in last year's budget. It will be established by August, and despite jettisoningthe Medicare co-payment, the government expects the fund's balance to reach $20 billion by 2020. It will distribute $10 million from the fund in 2015-16, and expects to allocate more than $400 million to projects over the next four years.

The single largest saving in the health budget – about $963 million over five years – will come from what the government calls "rationalising and streamlining" health programs, including "flexible funds" which support initiatives in areas such as infectious and chronic diseases.

The government has committed $485 million to reform the system of electronic health records, which it says was mishandled by the former Labor government. The revised scheme is expected to cost about $200 million less than had been previously allocated. An opt-out model will be trialled to overcome disappointing levels of take up.

Dental care has also taken a hit, with the government extracting savings from dentist workforce programs and child dental programs.

A further $252 million will be saved from reducing the amount the government pays drug companies for medications for common conditions such as asthma and high cholesterol. The government hopes to achieve further savings of about $3 billion over five years through its ongoing negotiations with chemists over a new community pharmacy agreement.