Critics have warned the federal government over its plan to wind back a private health rebate for over-65s amid fears the change could further inundate an already struggling public health system.

In April, Health Minister Mark Butler announced the Howard-era rebate – which set up an age-based tier system for subsidised private health care – would be replaced in favour of a standard rate for all ages that was dependent on income.

The change is expected to save the federal budget $3bn over forward estimates and affect about 1.2 million pensioners out of the three million people aged over 65 who have private health insurance.

The savings will be redirected to fund other aged care commitments made by the government, including 5000 extra beds per year and the scrapping of co-payment costs for showering, dressing and continence care services under the Support at Home program.

But state Labor governments in South Australia and NSW, as well as Coalition governments in Tasmania and Queensland, have rejected the plan over its impacts on public hospital demand.

On Wednesday, Nationals Senate leader Bridget McKenzie told Channel 7 the government’s plan was the “worst” outcome for elderly Australians who had spent decades on private health insurance.

“(They’ve) been on private health insurance for decades so that they can stay at their package as they enter old age for those hip replacements, knee replacements that we’re all going to need, only to find a government ripping out the rug under them,” Senator McKenzie said.

She warned state leaders were “furious” because of the “flood” of new patients set to enter the public system as a result of the changes.

Earlier, Employment Minister Amanda Rishworth described the insurance change as a “difficult but an important decision”.

“And the reason for that is that we need to be very resourceful with where we spend taxpayers’ money,” she said.

“And if we look at, particularly for older Australians, the demand is increasing for aged care, and we need to respond to it.”

Labor was not scrapping the rebate entirely, Ms Rishworth said, but the “extra percentage” on top of the rebate.

“There is still a rebate for private health insurance. It is just the same for everyone whether you’re older or whether you’re younger,” she said.