The Southern Highlands village is one of 450 regional towns set to receive an overhauled GP Rural Incentives Program (GPRIP) from July 1.

About $50 million in federal funding is spent each year to pay incentives to doctors to live and work in regional areas.

However, the former funding framework has unfairly advantaged some areas with large populations while overlooking smaller or isolated townships.

Assistant Minister for Health, senator Fiona Nash, said the new system would redirect money to towns with genuine difficulty attracting and retaining doctors.

"It makes more sense to use that money to attract doctors to where the greatest shortages are - small rural and remote communities, not big regional cities," Senator Nash said. "This means bigger incentive payments will go to doctors who choose to work in the areas of greatest need."

The maximum incentive to work in a town of fewer than 5000 residents, like Bundanoon, will increase from $12,000 to $23,000 for five years of service.

Doctors will need to stay in the rural or regional area for at least two years - up from six months - before they qualify to receive the incentive.

Hume MP Angus Taylor welcomed the boost for Bundanoon which, along with Penrose and Wingello, had been re-classified for funding under the new system.

Monash University developed the new system, called the Modified Monash Model, and uses Australian Bureau of Statistics' population data to determine classification.

Mr Taylor said better medical and health care in smaller communities was not just about GP numbers, but also patient access to a wider range of services.

"We are continuing to work on broader systems of care incorporating trainee doctors, skilled doctors and visiting specialists," Mr Taylor said.