Capping legal aid spending and reducing administration costs are being floated as ideas by a review.
A discussion paper released by the Legal Aid Review said surges in demand and costs, along with varying quality of services, meant the system was facing "real challenges".
Dame Margaret Bazley, who is heading the review, said demand for legal aid increased 23 percent between 2003 and 2008, with grants for criminal cases rising 51 percent between 2003 and 2009.
In 2007/2008, there had been 83,767 applications for legal aid with 73,905 granted.
In 2008/2009 this had risen to 95,303 applications with 85,158 granted.
Over the same period of time the cost of claims rose from $105.6 million to $123.9 million.
A growth in high cost cases was driving up the expenses with 100 cases (49 criminal, 45 treaty and 6 civil) making up $21.3 million of the cost and two percent of cases eating up a quarter of all spending.
The increasing number of claims had also not been matched with any economies of scale and the average cost to administer each claim had risen from less than $100 in 2000 to more than $250 in 2008.
"This is not a sustainable business model," the review said.
The discussion paper also identified problems attracting and retaining experienced lawyers in the legal aid scheme, including pay rates and the administrative burden associated with it.
"Long-standing inefficiencies" in pre-trial criminal procedure, which led to delays in the courts, were also putting a strain on the legal aid system, the paper said.
The review makes 73 suggestions or areas for discussion ranging from capping all or some of the budget, more use of a public defender service, more careful management of high cost cases and attracting better quality lawyers.
Law Society president John Marshall QC said the review raised some "very pertinent questions" which the society welcomed.
The report noted that it was harder to attract good lawyers to the legal aid system for a variety of reasons pay rates and red tape.
The society was considering extending the six months experience needed to practise as a barrister sole out to three years.
This, along with training and better remuneration, would improve the quality of legal aid, Mr Marshall said.
Justice Minister Simon Power said the review was aimed at finding a system that was structured "so it delivers effective services to those who need them most in a way that it cost-effective and sustainable".
"This review has the potential to improve the lives of the people who come into contact with the justice system, and give taxpayers real confidence that they're getting good value for money from legal aid expenditure."
The discussion paper is open to public submissions until October 9 and a final report was expected to be finished by November.
Labour MP Lianne Dalziel said the review would require measured and considered debate to ensure access to justice.
A proposal to bulk fund lawyers to deliver an agreed number of services deserved consideration, she said
Another Labour MP, Charles Chauvel, said extension of the public defender system was also worth looking at and Labour would be making a submission to the review.
