At the same time, federal funding for state and territory public hospitals should be abandoned and the 30 per cent rebate for private health insurance premiums abolished.
Under a model, proposed by Professor Jim Butler from the Australian Centre for Economic Research on Health, the commonwealth would establish a health benefits schedule under which patients could use rebates for procedures in both public and private hospitals.
For example, Medicare could contribute $7,000 towards the cost of a hip replacement procedure, even if it was done in a private hospital.
The rebate could cover the entire procedure or if not, the patient could elect to pay the gap themselves or use private health insurance.
Such a system would reduce public hospital waiting lists and foster competition between public and private hospitals, Prof Butler said.
"It would lead to much better access to facilities because I expect public and private hospital providers would make more capacity available for treatment," he said.
"Public and private hospitals would compete for patients on a level-playing field because the patients would have the same subsidy they could use in either system."
The model would also reduce private health premiums because insurers would be confined to covering the gaps rather than the full cost of private hospital treatment, Prof Butler said.
He acknowledged managing how doctors would be paid in the public system would be a challenge under his proposal because most specialists in public hospitals were salaried or sessional, while private doctors operated under a fee-for-service model.
Prof Butler will present his proposal to a public seminar on sustainable health funding at the Australian National University in Canberra tonight.
Comment was being sought from Health Minister Nicola Roxon.
