The Family First Senator, Steve Fielding, stunned other senators last night by using his deciding vote to kill off the surcharge, pre-empting debate on the Government's compromise bid to pass the controversial legislation.

The Government's plan to ease the surcharge threshold would have saved affected families up to $1500 in taxes but has come under fire from the Opposition and health funds who say it would generate higher premiums and slash memberships, putting extra strains on public hospitals.

The Medicare setback is the latest in a series of bills facing defeat or significant changes in the Senate where Labor needs to negotiate support from an unwieldy collection of minor parties because of the Coalition's decision to block legislation.

Labor's hit at health insurance was seen as a winner among critics of private insurance and among single people on $50,000 a year or more who, under existing arrangements, are hit by the 1 per cent surcharge on their income.

After successfully negotiating a deal to allow the luxury car tax to pass the Senate on Tuesday, the Government had hoped a compromise on the surcharge, which had the support of the Greens, would also get backing from the two remaining minor senators.

While the South Australian independent, Nick Xenophon, agreed to debate the proposal last night, Senator Fielding joined the Coalition to vote it down almost immediately, preventing any debate about possible changes.

Senator Fielding denied last night his move was a blunder, saying he was hoping the Government would return with a better proposal to protect low-income policy holders.

"They have got to fix it. This is a mammoth change … low-income earners would be hit," Senator Fielding told the Herald .

But the Greens health spokeswoman, Rachel Siewert, said of Senator Fielding's move: "The rest of us don't know what he is on about because we have not seen his amendments."

A spokesman for the Health Minister, Nicola Roxon, said the Government would continue pursuing its compromise plan revealed on Tuesday. This would lower from $100,000 to $75,000 the proposed income threshold at which single people would have to take out insurance or pay the surcharge. The Government proposes to keep the threshold for couples and families at $150,000.

The Government estimates the compromise would cut the number of people paying the surcharge by about 70,000 to 330,000.

Senator Xenophon has argued for the singles threshold to be lowered to about $69,000.

Senator Fielding has called for a rise in the health insurance tax rebate to offset what he says will be a rise in premiums generated by falling fund memberships.

Ms Roxon said last night: "At a time when many families are struggling with their household budgets, the Liberals are denying them tax cuts - in fact, they're even refusing to debate [them]."

Meanwhile, vehicle manufacturers attacked the Senate's decision to pass a watered-down version of the increase in the luxury car tax.

The Federal Chamber of Automotive Industries said it was disappointed senators Fielding and Xenophon supported the tax increase even though it would hurt the car industries in their home states of Victoria and South Australia.

"This tax hike was always bad policy and the various conflicting amendments passed by the Senate have only deepened the flaws," the chamber's chief executive, Andrew McKellar, said.