Federal Health Minister Sussan Ley has scolded state premiers for rejecting the Prime Minister’s radical tax plan as Labor laughs it off as a “humiliating defeat”.

Malcolm Turnbull on Friday conceded the plan he hailed days earlier as one of the greatest reforms in generations would be withdrawn, after it was rejected by leaders at the Council of Australian Governments meeting.

Prime Minister Turnbull: upset about withdrawing his plan. Getty

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He proposed reducing the federal government’s income tax collection and allowing the states and territories to collect the remainder to fund services like hospitals and schools – a power the states gave up in the 1940s.

Ms Ley said she was disappointed in the premiers for not stepping up, insisting the federation was out of date.

She denied the quick defeat of the proposal was an embarrassment.

“They’re quick to ask the Commonwealth to do their dirty work,” she told reporters in Melbourne on Saturday.

“We should never make an apology for having big ideas and the courage to make a difference.”

She took aim at Victorian Premier Daniel Andrews, insisting it was time he put his money where his mouth was.

“There’s a long list of requests he’s had for the commonwealth about things he wants to be funded.”

The closer a health dollar fell to the patient, the more effective that money would be, Ms Ley said.

Vic Premier Daniel Andrews is in the Health Minister’s sights. Getty

But the existing arrangement between federal and state governments left a lot of money spent on bureaucracy and less on the frontline in hospitals.

Foreign Minister Julie Bishop said the Prime Minister would have expected sensible dialogue, but some states just wanted to pass the buck to the commonwealth.

“I think that, in time, the states will see some of these opportunities more positively and I hope that there will be a dialogue that will lead to an assumption by the states of greater responsibility for their actions,” she told reporters in Washington.

Labor frontbencher Jason Clare said Mr Turnbull announced his policy on a football field on Wednesday and was forced to withdraw by Friday.

“I’ve had hangovers that have lasted longer than that,” he told the Seven Network.

Independent senator Nick Xenophon said it was a thought bubble that was always going to burst.

“I thought Marty McFly was the policy adviser,” Senator Xenophon told the Seven Network, referring to a character from the Back to the Future films.

Friday’s meeting ended with state and territory leaders accepting an extra $2.9 billion for their hospitals to 2020.

Ms Ley said the money would achieve real reform, with measures to avoid hospital admissions agreed by chief ministers.

She hit back at critics who said the money was inadequate to deal with the $57 billion the coalition cut from hospitals over the next decade in its first budget, insisting that money promised by Labor was never funded.