Failure to tackle rising costs or to invest in modern services has put the long-term future of the NHS in England under threat, a report warns.
Reconfiguration of services is proving controversial
The study, by the think tank Reform, argues that the long-term strength of the NHS is weaker than two years ago, despite record levels of investment.
It calls for deficits to be written off, and for increased patient choice and competition to drive faster reform.
Ministers said the NHS was "going from strength to strength".
The authors of the report for the right-wing think-tank, who were led by Professor Nick Bosanquet of Imperial College London, said government efforts to reform the NHS, introduce choice and competition and reconfigure services have been mired in delay and confusion.
Blaming vested interests opposed to change, the report said there was evidence of cutbacks on innovation, increased rationing and lengthening waits.
Thousands of people across the country have protested about reconfiguration of NHS services, which the government argues is needed to boost services, but which opponents fear will have the opposite effect.
A key problem was that the Department of Health had failed to control the spiralling long-term costs of manpower and infrastructure, the report, entitled NHS reform: the empire strikes back, said.
As a result, some planned service reconfigurations were being driven by the need to reduce deficits.
The best way to proceed, the report argued, was to separate the issues.
First, deficits had to be written off, then measures introduced to ensure rigorous financial discipline, better value for money, and service reconfiguration based on the aim of increased patient choice.
Professor Bosanquet said: "The Department of Health has been so busy fire-fighting that it has not developed a process for getting real value.
"The beginning is the abolition of deficits to allow a fresh start; then investment in new services and competition can follow."
Professor Karol Sikora, a cancer expert at Imperial College London and advisor to Reform, said 2007 was a critical year for the NHS.
"If the reform strategy is not escalated, billions of pounds will have been wasted.
"It's going to be a turbulent ride but the NHS has the resources, talent and skills to get there. The empire must move on or it will self destruct."
A Department of Health spokesman said: "The NHS is going from strength to strength.
"Reform has already led to greater choice for patients of where they go for treatment, record low waiting times, a fall in deaths from the big killer diseases and services being delivered in a community setting - meaning increasingly efficient use of resources and better, more convenient care for patients."
The spokesman said the NHS would be in overall balance by the end of the current financial year, and would deliver a surplus by the end of 2007-08.
But he said there was no question of deficits being wiped out.
"It would be unfair for overspending organisations to bailed out by those that underspend."
However shadow health secretary Andrew Lansley said: "The Department of Health has presided over a catalogue of failures in the management of the NHS. The report reiterates this.
"Centrally imposed initiatives and costly targets have plunged the NHS into a record deficit.
"The NHS needs greater freedoms at a local level, and not more centralisation, to return it on a stable and sustainable financial footing."