Ottawa had been seeking a stay of a Federal Court decision from July that gave it until next Tuesday to put in place a coverage system for refugee health care claims that is in keeping with the Constitution.
A Federal Court of Appeal judge has now turned down that request.
"The appellants' motion for an order staying the judgment ... is dismissed," Judge Wyman Webb wrote in the decision released late Friday.
A spokesman for Immigration Minister Chris Alexander was critical of the decision.
"Our government disagrees with the court's flawed decision and will continue to do what's necessary to protect the interests of Canadian taxpayers and genuine refugees," Kevin Menard said in an email.
Lawyers for the refugee claimants who brought the case had argued the stay was unnecessary as the government could just revert to the pre-2012 system (referred to in Friday's decision as the 1957 program), which granted coverage to everyone.
The Conservatives had implemented a new refugee health care program in 2012 which drastically cut coverage and meted it out depending on the nature of the refugee claim itself.
They argued that since the old program is no longer operational, the four months given by the Federal Court to create a new one wasn't enough time.
In his decision, Webb said allowing the stay would have meant saddling affected refugees with reduced health-care coverage for an undetermined period while the case continued to churn through the courts.
"It seems to me that the effect of denying the stay (which would mean that the changes to the 1957 program ... would not be made) would be to defer these changes until the final resolution of the appeal, if the appellants are successful," he wrote.
"The harm that would be caused by reverting to the 1957 program ... is outweighed, in this case, by the harm that would be suffered by those who would have reduced health coverage under the 2012 program (if the stay is granted and the respondents are ultimately successful)."
During arguments Thursday, lawyer Lorne Waldman called the initial ruling a "stunning indictment'' of a mean-spirited government policy that provided no benefit to the country.
As a result, Waldman called on Webb to reject the government's request to stay the lower court decision pending disposition of its appeal.
In July, Federal Court Judge Anne McTavish lambasted changes the government made in June 2012 to a program first established in 1957 that extended health-care coverage to asylum seekers.
McTavish struck down the changes as cruel and unusual treatment, and gave Ottawa four months — until Nov. 4 — to remedy the situation.
In his submissions, Crown lawyer David Tyndale said implementing the McTavish ruling would create confusion because the system, changed in 2012, could be changed again next week, and again if Webb orders a stay in the future, and then possibly again if Ottawa prevails on appeal.
In addition, Tyndale said, the four-month window McTavish gave the government simply wasn't long enough to allow the government to make the necessary changes.
Waldman, who represents refugees in the case, urged the court to reject that argument, saying the government has shown itself capable of making policy changes within days when it wants to.
He accused Ottawa of dragging its heels, and said it should not now be allowed to argue it was short of time.
The government, he said, had provided no evidence that any of its stated objectives were achieved with a policy that sparked outrage among health-care groups across the country.
The new policy, he said, was deliberately designed to make life harder for would-be refugees to deter them from coming to Canada or to persuade them to leave.