Treasury has reportedly underestimated the cost of changes to the Medicare levy by around half a billion dollars.
An independent study by the accounting firm PriceWaterhouseCoopers has found an extra 900,000 patients would leave private health cover and use public hospital facilities under the changes announced in the budget.
This is almost double the amount of people the federal government had originally estimated would be reliant on the public system as a result of its Medicare reforms.
According to the PriceWaterhousCoopers audit the dramatic increase in the threshold for the Medicare levy will leave the states an estimated $1.76 billion dollars out of pocket over the next four years.
NSW alone is expected to lose $480 million.
The annual income threshold at which the Medicare levy kicks in is set to rise from $50,000 to $100,000 for singles and from $100,000 to $150,000 for couples, under budget plans announced on Tuesday.
The move means the Government will collect less surcharge revenue, but will save more money by no longer having to pay the 30 per cent rebate to people previously in private health care.
The budget papers estimated a saving of $232 million in 2008-09, with $299 million expected to be saved over four years.
Mr Swan announced, the day after the budget, that the Treasury had found the measure would encourage 485,000 taxpayers to drop their private cover, or not take it up.
However the PriceWaterhouseCoopers study, commissioned by the Australian Health Insurance agency, found in order to achieve the target saving 908,163 people, not the 485,000 taxpayers claimed by the government, would have to abandon the private health system.
The mistake is tipped to blow a $535 million hole in the budget over the next four years.
The proposed changes to Medicare are driven by an ideological opposition to private health, Opposition Leader Brendan Nelson says.
Dr Nelson said it was also a savings measure for the government who will no longer pay the 30 per cent rebate for people who opt out of the private sector.
"What the government is doing is taking close to a million people out of private health insurance, adding them to public hospital queues, putting an inflationary impact on premiums," Dr Nelson told ABC television.
"This whole thing is driven ... by the Labor Party's general opposition to people having private health insurance."
"They will be paying less money in the private health insurance rebate of 30 per cent."
Dr Nelson said Labor had "completely failed Australia" and the opposition would use its Senate majority to block the proposal.
A massive hole has been found in the new federal budget that is threatening to leave the new Rudd government red faced.