Australia Post has put its hand up to run Medicare and the pharmaceutical benefits scheme (PBS) services from its shop fronts, as the federal government calls for expressions of interest in its plan to outsource the ageing and expensive system to make budget savings.

However, the government’s plan goes against a key recommendation by the National Commission of Audit not to outsource the assessment of payment entitlements.

The payment processes make up the second largest responsibility of the Department of Human Services, which disburses more than $400m every day, but the ageing 30-year-old IT system is posing a “significant risk to a core function of government”, according to the commission of audit in May.

“The complexity of the payments architecture and interactions between payments creates customer confusion, errors and rework, and requires a highly knowledgeable workforce to provide support,” it said.

A replacement system, authorised in the 2013-14 budget, is expected to cost between $1.2bn and $1.5bn, and the Department of Health is now calling for expressions of interest from Australian companies with IT and shop front capacity to take over.

The chief executive of Australia Post, Ahmed Fahour, confirmed at a Q&A in Sydney on Thursday that his company would make an application.

“Australia Post is a proven, trusted services provider and has a demonstrated track record delivering important services to the community,” Fahour told Guardian Australia. “We will be responding to the expression of interest by the Department of Health.”

Citing their involvement in passports, travel and tax services, Fahour told the Australian Financial Review the company is “uniquely positioned as an organisation that provides these trusted services across a range of areas throughout the last number of years, and certainly with its physical presence and its trusted brand, we would be in a very strong position.”

A spokesman for the Department of Health told Guardian Australia the recipient of the contract will be expected to process claims and assess entitlements as well as process payments.

However, this plan goes against the commission of audit, which specifically stated it “does not support the outsourcing of assessment of entitlements.”

“The commission recognises outsourcing of the payments system arrangements would be a substantial and potentially high-risk undertaking. It requires very careful consideration,” it said. “This would include a judgement on whether the assessment of entitlements is an appropriate activity for outsourcing; whether outsourcing should be confined to the development and maintenance of the replacement for the Income Security Integrated System, or whether the payment mechanism only should be outsourced.”

The Labor party has strong misgivings about the plan, opposition health spokeswoman, Catherine King, told Guardian Australia.

“Labor is extremely concerned about the impact this will have on Australian jobs, the data security of all Australians and the efficiency and effectiveness of basic frontline services like the processing of Medicare claims,” she said. “The Abbott government’s moves towards privatising Medicare and the Pharmaceutical Benefits Scheme claims means even more cuts to frontline public services and Australian jobs.”

It has previously been suggested that Australia Post could take over Centrelink services as well. A proposal by the company envisaged physical service points would include 334 Centrelink centres and 139 Medicare offices brought into the Australia Post network.

National Australia Bank is also considering making a pitch for the Medicare and PBS services, the AFR reported.