The Department of Health has disbanded the unit looking at outsourcing Medicare payments, effectively confirming the system won't be privatised.
The department also directed PricewaterhouseCoopers - the private firm advising the unit - that the payment system must remain delivered by government.
It reflects an election commitment made emphatically and repeatedly by Prime Minister Malcolm Turnbull that all Medicare services currently delivered by government would stay that way.
In an email to staff seen by AAP, Secretary Martin Bowles advised he's establishing a Medicare and Aged Care Payments Division from Monday.
Staff working on the $5 million 'digital payments services task force' - which was used as partial proof by Labor that the coalition was planning to privatise Medicare - would be transferred to the new division.
Mr Bowles told employees the move is "consistent with the government's election commitment that every element of Medicare delivered by government today will continue to be delivered by government in the future."
"This recognises that the modernisation and improvement of payments services will become a continuing and embedded part of the department's work," the email states.
The task force looked at saving taxpayer money through better processing of about $50 billion in claims and payments annually.
The privatisation of Medicare became a hot election topic when Labor seized on to the task force, among other factors, and launched what became known as the "Mediscare" campaign.
A spokeswoman for the department confirmed PwC's contract had been updated to explicitly reflect the prime minister's commitment.
"PwC remains the best placed to continue to provide the technical expertise needed to modernise the Medicare payments system," the spokeswoman told AAP.
The department maintains PwC was not contracted to privatise the Medicare payment system.
Several private companies, including telcos such as Telstra, EFTPOS providers and the big banks, have shown interest in running the system.
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