The Tory party will seek to undermine the Budget by publishing a radical report today claiming that funding the health service from general taxation is unfair, inefficient and antiquated.

The controversial document, entitled Alternative Prescriptions, is the first result of the Conservatives' overall policy review ordered by Iain Duncan Smith last year.

Having surveyed 20 different countries' health systems, it argues that other European countries provide better- quality health care through individual social insurance schemes and greater private-sector provision.

The document, which is the Tories' alternative to the Wanless Report due out this week, says that the NHS's monopoly is reminiscent of health care in the former Communist countries of Eastern Europe.

Last night, the Government claimed that the report proved that the Tories were determined to dismantle the present health service and create a two-tier system with better care for those who paid.

The Conservatives rejected the allegation and said everybody knew that the Wanless Report had not been allowed to consider radical alternatives to funding from general taxation.

In a foreword to his party's document, Mr Duncan Smith says that Britain must spend more on its health service, but that the NHS must be reformed for that money to produce real improvements.

"We must have a system based on need not on the ability to pay, but that need should be defined by patients working with doctors and not politicians," he says.

"The problems of the NHS are not just a matter of money. It is the system that is failing. Despite increasing taxes by £100bn since they came to office, they have failed to deliver any significant improvement."

The report follows months of Tory investigations into health systems abroad, which have seen Liam Fox, the Conservative health spokesman, travelling the world to talk to doctors, nurses and hospital managers. It insists that social insurance systems used in countries such as Belgium and Germany are fairer than the fully tax-funded system in Britain, which means those stuck on waiting lists often pay extra to go private.

The report uses the World Health Organisation's benchmark of fairness to show that the NHS fails to offer the very poorest as good a service as systems in Germany.

Andrew Smith, Chief Secretary to the Treasury, said last night: "This document contains no guarantee of free health care for everyone at the point of need. Instead, it points to an American-style Medicaid system with Middle England being forced to pay."