The federal health department's management of grants worth $2 billion under the Morrison government has been slammed for "deliberate breaches" of legal requirements.

A scathing auditor-general's report released on Monday found the administration of the Community Health and Hospitals Program was "ineffective and fell short of ethical requirements".

The $1.25 billion initiative was announced in December 2018, five months before the 2019 federal election, with a further $747 million committed for associated projects.

Funding was provided in the form of grants to Primary Health Networks and state and territory governments in a bid to ease pressure on community services and hospitals.

"Health's administration of CHHP grants was not appropriate, involving deliberate breaches of the relevant legal requirements and the principles underpinning them," the report said.

The audit found the governance of the funding arrangements was "not effective".

Only two of 63 national partnership agreement projects assessed by the health department were deemed "highly suitable" with more than half (34) chosen outside any expression-of-interest process.

Seven of 108 grants had no opportunity guidelines.

"Executive oversight, risk and fraud management were deficient," the report found.

"Projects funded under grant agreements with Primary Health Networks and non-government organisations were designed, assessed, established and managed in a manner ... largely inconsistent with the commonwealth grants rules and guidelines."

Among the report's four recommendations were ensuring advice to government is consistent with the Commonwealth's grant rules and guidelines, and grant assessments support a value-for-money recommendation.

The Department of Health and Aged Care has accepted all four recommendations.

Health Minister Mark Butler said the program exemplified the Morrison government's time in office, which was "all announcement and no delivery".

"I've directed my department to run the ruler over the remaining projects that have stalled to ensure Australians get value for money," he said.

Opposition health spokeswoman Anne Ruston said it was "critical important healthcare funding is directed to where it will be effective".

"This program was developed to deliver local health and hospital services in every state and territory, and it was really disappointing to read the auditor-general's findings on the department's administration of these important grants," she said.

In response to the report, the health department wrote that it had started implementing improvements.

"Throughout the administration of the program the department has considered carefully its stewardship obligations and has acted with honesty, impartiality and transparency," it said.

"The findings will support the ongoing review and improvement of the department's advice to governments."