The cabinet has come out against a proposal to set up a national health insurance scheme, saying that it would not help to reduce spiralling health costs.
The proposal, which was launched by the centre-left Social Democrats, wants to set up a single non-profit insurance system based on an individual's income.
The plan is still expected to be put to a nationwide vote at a later date.
The interior ministry said on Friday that the cabinet would rather stick with the status quo, where more than 100 private insurers compete against each other.
The government believes that a system which relies on different insurers - where people can switch companies without any restrictions - offers better perspectives than a state-run monopoly.
It adds that competition slows rising costs and presents a wealth of choice.
The government rejects the proposed structure of a single health scheme.
It fears the management system - with representatives from the state, healthcare providers and the public - could be undermined by divergent interests.
The transfer of basic insurance cover from private insurers to a public scheme would also be complex and difficult to implement.
Suggestions that premiums could be paid according to a person's income as part of a national health scheme were also rejected.
The government believes this would be nothing more than a new tax that would mostly affect the middle class.
Swiss voters rejected a similar proposal in 2003.
The government says that the current system based on individual premiums works and is reviewed on a regular basis.
As of 2007, for example, premiums for children up to the age of 18 and for students from low-income families will be cut in half.
The Social Democratic Party criticised Friday's cabinet decision.
It said the government had not come up with an alternative and had no idea how to tackle the country's health-insurance problems.
The party added that the current system was costing too much and was socially unjust.
swissinfo with agencies
Rising cost of health insurance premiums:
5.6% in 2006
3.7% in 2005
4.3% in 2004
9.6% in 2003
9.7% in 2002
5.5% in 2001
3.8% in 2000
The people's initiative for a single health insurance scheme proposes a radical overhaul of Switzerland's healthcare system.
It suggests the creation of a national health insurance scheme, with premiums based on income.
The government has rejected the proposal, saying it would not rein in rising health costs and would be tantamount to a new tax.