Tony Abbott has declared the Medicare co-payment "dead, buried and cremated", leaving patients in the dark about what will replace the controversial measure.
Health Minister Sussan Ley is determined to find a way to cover the long-term cost of Medicare because "doing nothing is not an option".
Federal cabinet killed off the $5 doctor visit charge on Monday before telling an overjoyed coalition party room on Tuesday.
However, the move has left the federal budget with a $1 billion hole over four years and no replacement policy has been announced.
The government has left in place a freeze on the rebate Medicare pays to doctors until 2018.
"What I have learnt is that the co-payment is dead, buried and cremated," the prime minister told parliament, revisiting the phrase he used about the Howard-era Work Choices policy.
"It is much better to learn than to be obstinate."
The original plan announced in the May 2014 budget was for a $7 co-payment but it failed to get the backing of doctors, health groups and non-government senators.
Now, following six weeks of consultation with doctors and community groups, Health Minister Sussan Ley said it was clear the charge did not have broad support.
"We recognise that we cannot introduce reforms to build a strong, sustainable Medicare without the support from the public and the parliament," she said.
Mr Abbott, a health minister in the Howard government, said he should have known the support of doctors was crucial to any Medicare reforms.
"I accept that it's taken us some time to come to this position," he told parliament.
Labor celebrated the government's decision.
"The GP tax has had more obituaries than anyone can imagine," Opposition Leader Bill Shorten told the caucus, adding the policy change was more about a prime minister trying to "save his own skin".
Medical groups and the Australian Council of Social Service warned the freeze on Medicare rebates would force doctors to introduce their own co-payment.
"Continuing the freeze will force GPs to pass on increasing out-of-pocket costs to patients and threaten the provision of quality clinical services," Royal Australian College of General Practitioners vice-president Morton Rawlin said.
It would also make some medical practices unviable and increase the cost of other parts of the health system.
Ms Ley will travel to Western Australia at the end of the week for further talks.
"Doing nothing is not an option," she told parliament.
The Intergenerational Report to be released on Thursday is expected to show the cost of Medicare rising from $20 billion a year to at least $34 billion a year over a decade, while the proportion of funds provided by the Medicare levy falls.
The policy backdown hasn't stopped unionists from planning rallies around the country on Wednesday calling for no cuts to Medicare and the ditching of other unpopular policies.
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