Reforms to curb workers' compensation claims, aiming to rein in spiralling costs, were voted down in parliament on Friday.
The changes would have made it harder to claim for psychological injuries like post-traumatic stress disorder, anxiety and depression in the scheme, which covers more than 3.6 million workers in NSW.
The state government says psychological claims comprise 12 per cent of workers compensation claims, but 38 per cent of the scheme's total cost.
Asked on Monday if the government would move to revive the legislation he has championed all year as essential and urgent, Treasurer Daniel Mookhey raised the white flag.
"We are going to shift our focus now in getting our charitable sector, our small business sector and many others braced for some pretty steep increases in premiums," Mr Mookhey told ABC radio.
He said without the reforms, insurance premiums would likely rise in NSW by "double digits over the next two years at least", with the government to receive final advice on the issue on Monday.
"We expect NSW will have the highest premiums in the country," he said.
He blamed the government's failure on the state opposition, which he said refused to negotiate on the reforms that were announced in March.
The Liberal opposition did not immediately respond to a request for comment.
The NSW Council of Social Service, the peak body for the state's social services sector, said struggling families and those impacted by natural disasters would be hurt by the impasse.
Many charities would have to scale back services and teams during the peak holiday season due to higher premiums, chief executive Cara Varian said.
"As we head into Christmas, and we're expecting there to be a big disaster season as well, the charities are gearing up ready to prepare but in reality they will be limited because of the cost," Ms Varian said.
The Business Council of Australia called on state politicians to support what it said were important reforms.
"Without these reforms, businesses will face added premium pressure, making it harder to invest, employ and grow," the body representing Australia's largest employers said in a statement on Friday.
Unions NSW said in a statement that parliament's rejection of the bill was a message to the government to "rediscover compassion and dignity for traumatised and vulnerable workers".
"This is a missed opportunity to reform the NSW workers' compensation system to improve it for everyone involved, especially injured workers," Unions NSW secretary Mark Morey said on Friday.
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