The Home Office is also devising a series of pilot schemes to buy in greater supervision and services from the National Health Service.
While one of the main aims of ministers is to move as many disordered offenders as possible into hospitals, the reality is that lack of beds and other provision in the community means that most remain in jail.
Studies have shown that about a quarter of the 47,000-plus prison population has psychiatric problems.
The moves come in response to widespread criticism of the Prison Medical Service and in particular its psychiatric services following the doubling of prison suicides in the 1980s. The Home Office's own scrutiny report two years ago was also damning of the medical service's isolation from mainstream medicine.
Although it fell short of reformers' demands that the NHS take over responsibility for prison hospitals completely, the scrutiny report urged much closer alignment with the health service and called for more civilian doctors and nurses to be given contracts to work in jails instead of career prison service staff.
The Home Office has devised 20 pilot schemes around the country which include buying in clinical as well as psychiatric care from the NHS. On the Isle of Wight, for example, officials are negotiating a contract with health authorities to provide all health care in the island's three prisons, Albany, Parkhurst and Camp Hill.
Two lined up for increased NHS psychiatric care are Brixton jail in south London and Feltham young offenders' centre in west London - both deal with large numbers of the mentally ill and, in the past, both have had spates of suicides.
The Home Office cites the new jail, Belmarsh in south-east London, which buys in two full-time NHS psychiatrists. Through their contacts, they are able to move the seriously ill into hospitals within about three days of diagnosis compared with, for example, Brixton prison which currently takes on average two weeks.
Proposed minimum standards which also govern staff training and improved qualifications include allocating a named doctor and health care worker to each patient; ensuring patients have as much time out of their cells as possible - ideally 12 hours to include 6 of clinically advised activity; and that there is through care after the prisoner is released or transferred.
But last night, while the changes were welcomed, there was criticism that there was no date for implementation and that reform did not go far enough to address the 'services' punitive and out-dated medical culture'.
Ian Bynoe, legal director of Mind, the mental health charity, said: 'Better health care will need more than just an NHS label. Staff must be accountable to prisoner patients in new and effective ways, ensuring that they get NHS specialist treatment when they need this.'
Mr Bynoe and Stephen Shaw, of the Prison Reform Trust, feared the Treasury axe might fall on both NHS resources and on Home Office contract funding, scuppering the proposals, leaving many services untouched and prisoners without the treatment they needed.