Some 250,000 people are in line for a tax cut and almost half a million people are set to dump private health cover after the Rudd government struck a deal to ensure changes to the Medicare levy surcharge passed parliament.
As late as Wednesday night, the government and independent Senator Nick Xenophon remained deadlocked on the bill, which sets the income levels at which the Medicare levy surcharge kicks in for people without private health insurance at $75,000 for singles and $150,000 for couples.
Senator Xenophon was insisting the levels should be set at $69,000 and $138,000 and indexed to the consumer price index (CPI), while the Greens said they would not support a level for singles lower than $75,000.
But faced with the prospect of a second Senate defeat of moves to change the income levels for the first time since they were set by the Howard government in 1997, a breakthrough deal was struck Thursday morning.
Health Minister Nicola Roxon said an agreement had been reached with Senator Xenophon and the Australian Greens for the thresholds to be $70,000 for individuals and $140,000 for couples, indexed to wages growth, not CPI.
The compromise deal would provide immediate tax relief to 250,000 Australians and generate $380 million in revenue over four years, she said.
"Obviously we all stand here ... not with an outcome that each of us is perfectly happy with but I think it shows that in these difficult economic times that sensible people can come to sensible agreements," Ms Roxon told reporters in Canberra.
"I am disappointed the Liberal Party don't want to be part of those sensible discussions.
"It is something which means they have been left out of the debate, blocking tax relief for hundreds of thousands of Australians and not engaging in what is a legitimate discussion about how we properly support our public hospitals and ensure we also get the balance right in supporting our private health sector."
Treasury predictions indicate 492,000 people will bail out of private health funds under the agreed new thresholds.
But the health minister said thresholds were below what many industry groups had lobbied for and were unlikely to have any significant impact on private health cover premiums.
Senator Xenophon said a key part of the deal was there would be a Productivity Commission inquiry into the health system early next year.
"This hasn't been an easy process but it shows that with goodwill, with negotiation you can work through a difficult issue," the South Australian independent Senator told reporters.
"I am concerned about that tipping point in terms of having too many people exiting from the private system, the impact that would have on public hospitals and on private health insurance premiums, but you also need to acknowledge the equity issue of not having this threshold measure indexed back in 1997."
Greens health spokeswoman Rachel Siewert said the government had assured her party there would be no negative impacts on the public hospital system and had accepted an amendment to ensure a review of the impacts of the changes on the public hospital system.
"At this important time (of) the (international) economic crisis we thought it was particularly important we get an outcome now so we can start delivering real outcomes for Australians right now rather than having to put it off, yet again," she said.
Opposition Leader Malcolm Turnbull told AAP he still thought it was a "bad measure".
The Medicare levy surcharge changes are set to be voted on in the Senate later Thursday.