Family First's Steve Fielding has killed the government's Medicare bill that would have delivered up to $1,200 of tax relief to 330,000 people.
Senator Fielding joined the coalition to vote down the government's planned changes to the Medicare levy surcharge (MLS) thresholds, while independent Senator Nick Xenophon and the Australian Greens sided with Labor.
The defeat of the bill at the second reading meant senators had no chance to move amendments.
This is the second time Senator Fielding has killed a government bill at the second reading stage.
He took the same action to scuttle the government's luxury car tax bill before the government agreed to concessions. It was finally passed by parliament.
"I am disappointed that Senator Fielding has refused to even debate our very sensible proposal," said Health Minister Nicola Roxon.
Senator Fielding said the government had failed to agree to relief for low income earners who have private health cover, possibly in the form of higher rebates.
Family First had proven itself not to be obstructionist considering it worked with the government on a compromise deal for the luxury car tax bill, he said.
He said several struggling low income earners and pensioners, some of whom have suffered strokes and rare illnesses, had contacted his office worried they could not afford a hike in private health cover premiums.
"They have had to give up a lot just to be able to afford it. These are people who I would have thought the Rudd government were interested in helping," Senator Fielding told AAP.
"You have got to realise that for every one Australian that gets a tax break under this change, three to four other Australians get an increase in their health premiums."
Opposition health spokesman Peter Dutton said the government's bill was fundamentally flawed from the outset and the revised thresholds did not correct those flaws.
He said had the bill succeeded it would have sparked a blow-out in public hospital waiting lists and driven up private health insurance premiums.
"The Senate tonight has voted down a bad public policy measure that would have had a disastrous impact on Australia's health system," Mr Dutton said.
The government wanted to lift the income levels at which the one per cent MLS kicks in for people who don't have private health insurance from $50,000 to $100,000 for singles, and $100,000 to $150,000 for couples.
But it gave ground this week with Ms Roxon announcing the singles threshold would be lowered to $75,000.
A Senate inquiry into the bill earlier this year was told private health cover premiums would jump by about $70 a year if the thresholds were increased to the initial proposed levels.
Treasury projections indicate that even after the lowering of the singles threshold to $75,000, about 583,000 people would dump private health insurance if the bill had succeeded.
Before the vote, Ms Roxon used question time in the lower house to urge the coalition to support the bill.
"It's time for the opposition to stand up and say whether they are for tax relief or not," she said.
Ms Roxon said she had made it clear to the private health funds the altered thresholds were not a green light for them to seek higher premiums.
"We have made very clear that we will take a dim view of private health insurance funds who think that a tax whack for working families is an excuse to try to jack up their premiums," she said.
When the Howard government first introduced the MLS in 1997, 167,000 paid the tax. That number ballooned to 465,000 by 2005-06.
The government has two options available to it to try and get its bill through parliament. It can either reintroduce the same bill into the Senate and agree to amendments or reintroduce an already amended bill into House of Representatives, which would then pass it up to the Senate.