Health department bosses have described their radical proposal to remake hospital funding as "future gazing" after the Turnbull government declared it would never adopt the controversial policy.

The private health insurance rebate would be abolished, consumers would be charged more for extras cover and the states would be forced to find more money for public hospitals under the plan.

As revealed by Fairfax Media on Monday, the nation's most senior health bureaucrats – Department of Health Secretary Martin Bowles and his deputy Mark Cormack – are members of a secretive taskforce formed to develop the policy around a "Commonwealth Hospital Benefit" (CHB).

Health Minister Greg Hunt immediately ruled out adopting the policy.

"Not government policy. Won't be government policy. Will never be government policy," Mr Hunt said.

Mr Hunt said the taskforce – funded by the department but run by a private think tank called Global Access Partners – pre-dated his time in the portfolio and he had already told bureaucrats he was not interested: "I've rejected it once. If it ever comes forward, I'll reject it again."

Under intense questioning in Senate estimates on Monday Mr Bowles confirmed he made the decision last year to set up and fund the taskforce after talks with Global Access Partners' (GAP) chairman Peter Fritz.

Mr Bowles and Mr Cormack attended meetings of the taskforce and delivered a presentation on the proposal at one of its three gatherings. But they say they made it clear it was not government policy.

Mr Bowles said the proposal was only ever a concept and he had wanted to put more "colour and light" around it.

"I don't apologise for that," he said. "Policy thinking should always happen and we need forums to make that happen.

"It was in its infancy. It was future gazing."

Officials attended a GAP meeting that explored the proposal just four days after Mr Hunt apparently told them not to pursue the idea in March.

And Mr Cormack met with members of GAP as recently as May, two months after they say Mr Hunt ruled out the proposal.

Even government members of the estimates committee were clearly displeased with Mr Bowles. Liberal senator Dean Smith suggested the department had been "freelancing" by continuing to work on the policy.

They insisted there was nothing secret about the taskforce even though it was never announced, never released anything publicly and branded its material – leaked to Fairfax Media – as "confidential".

Mr Bowles insisted the taskforce was fully independent – even though the government paid for it with a $55,000 contract.

"It's not independent if you're paying for it," Greens senator Richard Di Natale said.

Under the plan, the Commonwealth would "pool" the approximately $20 billion it currently gives to public hospitals each year with the $3 billion it pays to private sector doctors and the $6 billion it spends on the rebate to help people pay their private health insurance premiums. 

It would use the money to pay a standard benefit for services regardless of whether they are performed in a public or private hospital, or whether people choose to be treated as public or private patients.

While the Turnbull government struck a three-year hospital funding deal with the states last year, it has flagged it wants a more long-term, less ad-hoc agreement – and a CHB proposal could fit the bill. COAG is set to revisit the issue of hospital funding next year to set the course for a post-2020 agreement.