An incident reporting system designed to capture adverse events such as patient falls, medication errors and wrong-site surgeries in NSW hospitals is plagued by "flaws" and "significant" upgrade delays, a parliamentary inquiry has found.

The year-long inquiry into healthcare delivery has recommended NSW Health urgently upgrade the Incident Information Management System, ensure the deaths of people with a disability are correctly classified, and improve treatments for patients with mental illness.

The Incident Information Management System in NSW hospitals is plagued by problems. Credit:Edwina Pickles

The Public Accounts Committee gathered evidence the system - rolled out in 2005 to reduce errors in public hospitals - was "malfunctioning and unreliable", potentially "impacting on patient care".

"It has, over time, become not as sophisticated as we would like," NSW Health secretary Elizabeth Koff told the inquiry earlier this year.