Changes to the way hospitals are paid for the care they provide are being scaled back amid concerns over "financial volatility".
Emergency admissions will be covered by the scheme
The new system, known as "payment by results", means hospitals receive a set sum for each treatment they carry out.
The amount of a hospital's income which should come via this route by April has been cut from 70% to 30%.
The slowed-down introduction of the system follow reports hospitals
have manipulated it to increase income.
Ministers said cutting the target did not mean the government was "going soft" on the reform, which they said was aimed at making hospitals compete for funds by offering better care for patients.
Foundation trusts - which have control over their own finances - would introduce the system in full next year, and other hospitals by 2009.
A survey by the Health Service Journal suggested some hospitals which are currently piloting the system were attempting to manipulate it so that they could increase their income.
But the organisation which represents hospital trusts, the NHS Confederation, said this was not the case.
Under traditional arrangements, there is only a weak link between the payments hospitals receive and the number of patients who are treated.
Health Minister John Hutton said payment by results would only apply to waiting list operations from April and applying it to emergency admissions would be delayed for a year.
He added: "We have listened to what the NHS has been telling us, and this will reduce the financial volatility in the system. But this is not going soft on reform."
Mr Reid said payment by results was "a fundamental reform of the way the NHS is financed" and he was determined the system would be fully in place in all NHS trusts by the original timetable of 2008/9.
"Having listened to representations from all sides about the detailed implementation of this reform, I want to achieve an orderly transition to ensure a successful outcome by that time.
"NHS Foundation Trusts already use payment by results. As part of a phased programme of introduction, the new system will cover all elective care from this April, and operate in shadow form for emergency care and out-patients for the first year.
"In this way, payment by results will support the new wider choices NHS patients will enjoy from the end of this year."
He added: "On this timetable, England will be implementing this reform more quickly and more fundamentally than any other health system in the world."
In Denmark, a payment by results system has covered around 10% of hospital income since 1999, while in Ireland coverage increased from 20% in 1993 to 50% in 2002.
A spokesman for the NHS Confederation said it welcomed extra time now available for the full introduction of the payment by results system.
"It's good there is a delay because things were going too fast.
"People working in foundation trusts found it very hard, partly because they were using the system and no-one else was. A phased implementation is better."