Pathologists have hit back at a scathing report suggesting their industry should face hefty government funding cuts.

Pathologists insist a new report backs their claim that patients will be charged a co-payment for tests like pap smears if the federal government pushes ahead with planned funding cuts.

The Ernst & Young report, commissioned by Pathology Australia, shows the sector saved the federal government $2.4 billion in 2014/15.

It says the industry delivered $2 billion in savings through productivity improvements and saved almost half a billion by providing free tests under "coning" arrangements, which mean pathology providers are reimbursed by Medicare for the three most expensive tests requested by a GP at one time.

If a GP requests more than three, providers must provide the remainder free of charge.

The report says these free tests have grown steadily as a proportion of total pathology services from $50 million in 1999/00 to more than $450 million in 2014/15, adversely impacting on industry viability.

It says while pathology expenditure has grown an average 5.8 per cent each year since 1999, pathology's share of Medicare payments has fallen from 16 per cent to 12.5 per cent.

"When the costs of providing pathology services in Australia are compared internationally, Australia is a leader in delivering value for money, while maintaining quality of service," the report says.

It comes after a Grattan Institute report handed to Health Minister Sussan Ley in February slammed the pathology industry, insisting proposed funding cuts outlined in the government's mid-year budget update did not go far enough.

The government wants to scrap bulk-billing incentive payments for pathology services (worth between $1.40 and $3.40) which, along with changes to bulk-billing incentives for diagnostic imaging, would save $650 million over four years.

Pathologists claim patients will face co-payments of $30 for tests like pap smears if it goes ahead.

But the Institute's Stephen Duckett says the government pays too much for pathology and could save $340 million each year "from narrowing the margins of profitable corporations, not from cutting services to the ill and vulnerable".

While the number of tests being conducted in Australia increases, the rebate paid for those tests remains fixed.

Greater volumes are amounting to greater profits for the two publicly-listed companies that dominate the sector, but taxpayers are failing to reap any of those benefits, Dr Duckett says.

"We pay as if testing was still done by thousands of small providers manually processing tests, and not by two industry giants with automated services," he said.

Pathology Australia insists the Grattan report failed to account for the impact of coning.

"This report shows that the pathology industry has been providing an efficient and high quality service under increasing pressure for a number of years," Pathology Australia president Nick Musgrave said.

"Every year pathology does more for less and scrapping the bulk billing incentive will force providers to close services in some areas and patients will be asked to pay a co-payment."