AFTER years of dire predictions about ballooning health costs, the government has been able to identify $2.5 billion dollars in lower-than-forecast hospital and medicine expenditure over the next four years.

On the same day as the Health Minister, Nicola Roxon, hailed the government's ''record funding to hospitals'', the mid-year forecast has revealed a surprise fall in the forecast growth rate in hospital costs, generating $723 million over four years.

And in the wake of a controversial deferral of new prescribed drugs earlier this year to save costs, the government's accountants have found that demand for drugs available under the Pharmaceutical Benefits Scheme is expected to fall by $1.8 billion.

As well the government expects to save more than $200 million in changes to incentives for the infant vaccination scheme without reducing coverage.

This haul of savings has emerged as the government faces having to find more than $1 billion to pay for schemes it had hoped to axe: the private health insurance means test and the Medicare dental scheme.

However the forecast in the document of changes in hospital use and a fall in the expected growth in hospital costs has surprised analysts given the continuing health inflation including cost pressures such as nurse wage claims and the climbing cost of new technology.