Many Australians will face a new “co-payment by stealth” for pathology and diagnostic imaging tests because the Turnbull government is slashing its health budget by more than $650 million, doctors say.

In a move that has infuriated the Australian Medical Association and pathologists, Health Minister Sussan Ley has scrapped incentive payments to encourage bulk billing of pathology services such as blood tests and diagnostics such as X-rays.

While the government is hoping the cuts will be mostly absorbed by the competitive sector, pathologists are already warning of increased fees for patients that may cause some to forgo tests, and the closure of services in rural areas.

The incentive payments introduced by Labor in 2009-10 were hoped to maximise the numbers of patients receiving free services. The pathology incentive meant providers were given an extra $1.40 to $3.40 per patient. The diagnostic imaging incentive payment was 10 per cent of the set Medicare fee for each service, with the exception of MRI procedures which attracted a 15 per cent subsidy.

Ms Ley said the pathology incentive, which had cost taxpayers half a billion dollars since 2009-10, did not work, with bulk billing rates increasing just 1 per cent during that time.

The government said much of this high bulk billing rate for pathology services – currently sitting at 87.6 per cent –could be put down to the competitive nature of the industry, which comprises more than 5000 pathology collection centres.

Similarly, Ms Ley said Labor’s incentive payment for bulk billing of diagnostic imaging, introduced from 2009-10 at a cost of $1.3 billion over five years, had failed to increase bulk-billing rates beyond expected “natural growth”. However, data shows the proportion of bulk-billed diagnostic imaging services increased from 66 per cent in 2008-09 to 77 per cent last year.

“We do not expect the changes to affect the majority of consumers due to the high level of competition in the sector, and will ensure some of these services are better aligned with other medical and health providers, such as GPs,” Ms Ley said.

“Patients with high out-of-pocket medical costs will also continue to be covered by the Medicare Safety Net protections.”

The change means that from July, no pathology service will attract an incentive payment, which could lead to services charging extra out-of-pocket fees. For diagnostic imaging, the bulk-billing incentive will only be paid for concession patients, such as pensioners and children under 16. A separate MRI incentive payment for bulk billing concession patients will be reduced from 100 per cent of the Medicare fee to 95 per cent.

President of the AMA Brian Owler said the policy would increase costs for Australians, particularly the sickest and poorest patients.

“These measures are simply resurrecting a part of the government’s original ill-fated co-payment proposal from the 2014 budget … It is yet another co-payment by stealth,” Professor Owler said.

“The AMA strongly opposes the measures and will encourage the Senate to disallow them.”

The president of the Royal College of Pathologists Australasia, Michael Harrison, said new co-payment fees could cause some patients to not have tests done.

“This could have untold effects across healthcare, including: delaying the effective early diagnosis of cancer leading to premature deaths; compromising the effective treatment of diabetes and chronic diseases; and threatening the services of rural pathology,” he said.