Over-65s were set to lose additional discounts on their insurance under measures announced during May's budget, with the forecast $3 billion in savings to be redirected into aged care.
The policy sparked outrage by also proposing to take pensioners off their cheaper premiums, which are subsidised by the government.
The coalition and Greens on Wednesday teamed up to strip Labor's proposal from the Senate notice paper, meaning it couldn't be debated and passed during the session.
"They've paid their private health insurance all their lives, and at a time when they're most likely to need it, it's been ripped away from them," coalition Senator Anne Ruston told reporters in Canberra.
"The Albanese Labor government has declared war on older Australians."
But Labor was undeterred and has vowed to reintroduce the bill unchanged on Thursday morning.
"This is an absolute travesty that flies in the face of any of the members of the coalition's professed commitment to sound budget management," Health Minister Mark Butler told reporters on Wednesday shortly after the Senate threw the legislation out.
"We're not waiting around, we're going to reintroduce the bill tomorrow morning, and we intend to press ahead."
The aged care changes intended to be funded by the $3 billion in savings will also march on, whether Labor gets its way or not, Mr Butler said.
The Labor frontbencher blamed an uncompromising attitude from freshly minted Greens leader David Shoebridge for the party's intransigence.
The government had been in negotiations with the crossbench at the beginning of the week and were surprised the Senate had rejected the bill out of hand, Mr Butler said.
"If this is a change of approach under the new leadership of the Greens Party, then I think that is not going to be in the national interest," he said.
Senator Shoebridge said the Greens would pass the bill if Labor agreed to a carve-out to let pensioners continue to access more generous health insurance rebates.
"That's a revenue measure, but it won't be one that comes at the expense of picking the pockets of pensioners in the middle of cost of living crisis," he said.
Both Mr Butler and Senator Ruston declined to comment on whether they would support that tweak.
The bill does not propose to scrap the base rebates for individuals earning up to $164,000, and families earning up to $328,000, with those earning under $105,000 still receiving the maximum payback of 24 per cent.
"It's a pretty sad indictment on the government that they're in a situation where they mismanage their budget so badly that they can't actually manage both their health and their aged care portfolio," Senator Ruston said.
The government's setback came shortly after Labor was also forced to abandon a $5000 cap on allied health services for veterans, which was meant to save the government $750 million over three years.
The health minister pleaded with the coalition and Greens to let debate proceed on the bill partly to float alternative savings measures to fully fund the aged care improvements.
Mr Butler's department is on the hook for up to $60 billion in budget savings, factoring in sweeping changes designed to slow spending growth on the NDIS, which passed parliament in August.
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