Labor’s controversial changes to the private health insurance rebate for over-65s were effectively thrown out of parliament this week after facing widespread condemnation.

The proposal would have taken effect from April 2027, and was projected to claw back $3bn in savings for the federal budget over four years.

Under the current rules, people who are 65 or older currently receive a larger rebate on their health insurance premiums compared with young people on similar incomes.

The Coalition teamed up with the independent senator Jacqui Lambie in the upper house on Wednesday afternoon to have the draft legislation discharged.

The unusual alliance was joined by the Greens and other crossbenchers, with the minor party offering Labor support for the reforms in return for an amendment exempting pensioners. About half of over-65s in Australia receive the age pension.

The health minister, Mark Butler, has said the savings from bringing in a flat rebate across age groups would provide funding for an additional 5,000 aged care beds each year, and reintroduced the proposed changes – without amendment – to the parliament the following day.

The health insurance discount in its entirety is expected to cost taxpayers $7.9bn this financial year.

It isn’t compulsory to have private health insurance, but membership is incentivised by the government not only via rebates, but through penalties including the Medicare levy surcharge and lifetime health cover loadings.

There are two types of private health insurance: hospital treatment cover and general treatment cover, known as extras. They can be taken out as individual or combined policies.

More than half the population (55.5%) had some form of general treatment cover. Some 45% were covered by hospital treatment policies.

What is the private health insurance rebate?

It’s a government contribution to help people with the cost of their private health insurance.

To claim the rebate, people must be eligible for Medicare and have a complying health insurance policy with an Australian-registered health insurer.

They must also have an income for surcharge purposes that is less than the highest threshold.

In 2026–27, the highest income threshold to receive a rebate for singles is $164,000, and for families, $328,000.

The rebate can be claimed as either reduced premiums throughout the year, or a refundable lump sum when you lodge your tax return.

What are the proposed changes?

The rebate was first introduced by the Howard government in 1999, which then introduced higher rebates for older Australians in 2005.

This increased the rebate to 35% for people aged 65 to 69 years, and 40% for people aged 70 and above.

Income testing was then implemented by the Gillard government in 2012, with thresholds and rebate levels published each year from 1 April, but the higher discounts for over-65s remained in place. The current base tier rebate for under-65s is 24.118%, compared with 28.139% for 65 to 69-year-olds, and 32.158% for over-70s.

The federal government argues removing the higher discount for over-65s will make the system fairer.

What’s the problem?

The change will affect more than 3 million people aged 65 and over, and is expected to cost those older Australians about $250 a year each in higher premiums. For people with more expensive policies, this could be higher.

More than 1.2 million pensioners are expected to be affected by the government’s proposal, raising concerns about affordability and access in a cost-of-living crisis.

As a result of the rebate cut, almost 80,000 older Australians are expected to dump their private health cover by 2028-29, according to health department modelling released under freedom of information laws.

The states and territories have slammed the change, and warn there will be an influx of people in the public system who can no longer afford private health cover, placing already strained services under even more pressure.

Will the draft legislation pass?

Labor does not have a majority in the Senate, which means it needs the support of either the Greens or the Coalition to pass bills.

The Greens leader, David Shoebridge, has offered his party’s support to the government, should it agree to the condition of pensioners being exempted from scrapping the higher rebates.

Negotiations are continuing between the two parties, with only a limited number of parliamentary sitting weeks left in the year.

The Coalition is opposing the rebate cut but has said it would welcome pensioners being excluded.