Many English hospitals have struggled over the last year, according to the NHS watchdog's star-ratings system.
This year will be the last time hospitals get star ratings
Problems with finances and targets caused a fall in the number of hospitals achieving the top grade for the first time in four years.
But the Healthcare Commission said primary care, mental health and ambulance trusts had improved.
However, the watchdog warned the whole health service had to get its finances in order or patient care would suffer.
One in four NHS trusts - one in three if just hospital trusts are taken into account - ended the last financial year in the red, with a combined deficit of £500m. Overall this was balanced out by surplus elsewhere.
WHAT THE STARS MEAN
Three stars - High performance
Two - Good performance, some inconsistencies
One - Some concerns
Zero - Poor performance
Hospitals also struggled with a range of government targets.
Sixty-two out of 159 hospital trusts with A&E units failed to meet the 98% target for the number of people waiting for four hours.
One in 10 also failed to achieve the nine-month wait for an operation.
The problems meant that the number of hospital trusts achieving three or two stars dropped by 5% compared to the previous year.
Among the trusts achieving zero stars was Surrey and Sussex Healthcare NHS, which failed against a number of key targets including financial management and A&E targets.
Brighton and Sussex University Hospitals NHS Trust was also awarded zero stars, failing on waiting times and financial management.
However, the proportion of hospital trusts which had the top rating was still greater than primary care, mental health or ambulance trusts.
Overall, 42 of the 173 trusts dropped a grade, including six flagship foundation trusts. Foundation trust regulator Monitor said this would not affect their elite status.
But the star-ratings, which assess performance across a range of areas including waiting times, access to GPs, financial management, patient care and death rates, showed improvements had been made in reducing MRSA and the death rates for cancer, stroke and heart disease.
Healthcare Commission chief executive Anna Walker said if the problems with finances were not solved patient care could "suffer".
She added: "The overall improvement in performance this year should not be underestimated. Today the targets are a lot tougher, but despite this many trusts are raising to the challenge.
"The fly in the ointment is financial performance."
Dr Gill Morgan, chief executive of the NHS Confederation, which represents health service managers, said the health service has performed well despite an "ever more demanding set of targets".
HOW THE NHS PERFORMED
Hospital trusts - Drop in numbers achieving three and two stars, mainly because of problems with finances and targets. But hospital trusts still have the greatest proportion with a three-star rating
Ambulance trusts - 10% increase in numbers getting top grade, but a tenth - the largest ratio across NHS trusts - are still failing to get a star
Primary care trusts - Rise in numbers getting three stars and four trusts jumped two stars as cancer, stroke and heart disease death rates fell
Mental health trusts - The numbers achieving the top two grades rose by 15%, but the commission admitted it was still struggling to measure performance in the most meaningful way
During the last year the number of patients having to be seen within four hours by A&E units rose from 90% to 98%.
But she said: "There is no doubt that finances remain tight for many NHS organisations as a result of significant cost pressures including pay modernisation schemes, and prescribing expensive new drugs whose costs run ahead of inflation."
Dr Paul Miller, chairman of the BMA's consultants committee, said many trusts had struggled with the A&E target as it was not "realistic or sustainable".
And he warned patients not to pay too much attention to the ratings as they take "little account of the standard of clinical care or the success of treatments or operations".
Liberal Democrat health spokesman Steve Webb said some trusts were facing tough times, while Shadow Health Secretary Andrew Lansley said the NHS finances were "close to meltdown".
But the Department of Health hailed the results as an "improvement in performance".
This is the last year trusts will receive star-ratings. From next year they will be replaced by a "health check" which will involve self-assessment and spot inspections.