Minister of State for Primary Care Alex White has told the Dáil that the review of discretionary medical cards is to be suspended.
The decision was taken following a meeting of the Cabinet Sub-Committee on Health this morning.
The Health Service Executive will now set up a panel of experts to look at developing a new system where cards could be allocated based on medical need, the minister said.
A policy paper will also be drawn up to examine what legislation may be required to introduce the new system.
The review was heavily criticised amid widespread reports of people with long-term medical conditions losing their cards.
It was one of the biggest issues on the doorstep for politicians in the lead up to the Local and European Elections last week.
The HSE earlier said the medical card scheme is based on the Health Act 1970, which provides for cards on the basis of financial means.
It said medical card eligibility is reviewed on a regular basis and 644,853 reviews were conducted last year.
The HSE said that at the end of February this year, assessments had been concluded in 482,866 cases. It said 96.4% of those people continued to hold their card.
The HSE said today that it welcomed the Government's decision and said reviews currently under way will be suspended.
It also said no further reviews will take place "pending the outcome of the development of the new policy framework by Government".
The Irish Medical Organisation has said medical cards should be restored to those who have had them removed in recent months.
Opposition criticises Government
Fianna Fáil's Colm Keaveney welcomed what he said was the Government heeding the warnings of the Opposition.
He said it was unfortunate for the families of sick children that it had not happened earlier.
Sinn Féin TD Seán Crowe said the move was clearly a reaction to the anger on the doorsteps, and more detail was needed on what the announcement meant.
Independent Finian McGrath said the criterion should always be the medical condition involved, particularly in the case of young people.