Reforms designed to reward NHS hospitals for efficiency have yet to deliver significant improvements, a spending watchdog says.
Doctors believe the system is flawed
Under Payment by Results, introduced four years ago, trusts get a national fixed price for treatments, regardless of how much they cost to provide.
However, the Audit Commission says productivity has not risen greatly, and is calling for a tighter regime.
And doctors say the scheme may have "interfered with clinical judgement".
Payment by Results was introduced after it was revealed that the money spent on an operation by different trusts could vary dramatically across the NHS.
The "tariff" for each procedure or treatment was set at a roughly average level, so that some hospitals faced not covering their costs for each patient treatment, while others could make a "profit".
The idea was to provide an incentive for hospitals with above-average costs to drive them down.
In addition, instead of getting a lump sum from the local primary care trust, money "followed the patient", prompting suggestions that hospitals would actively compete against each other to attract them.
The Audit Commission, which reports on whether public money is being spent efficiently, found that the new system was now well established across the NHS, and had improved financial management in some trusts.
It also found that patient care had not suffered as hospitals worked harder to cut costs.
However, chairman Michael O'Higgins said significant increases in efficiency and productivity across the NHS had not yet happened, and called for "tariff" prices to be slashed towards the level of the best-performing hospitals.
"Payment by Results needs to develop so that it does what it says on the tin.
"In order to encourage a more efficient way of working, the price that the NHS sets for procedures should be set at the lower levels that some hospitals have shown can be achieved, rather than the average cost."
He also suggested that hospitals providing higher quality care should get some kind of financial reward.
Royal College of Nursing General Secretary Peter Carter agreed with the need for this.
"What we have at the moment is Payment by Activity, not Results, because the system does not recognise or reward the quality of care provided."
Liberal Democrat health spokesman Norman Lamb said the reform was "failing to get the best for patients".
"Payment by Results only works when all providers are competing for patients on an equal basis.
"As it currently stands, areas where the scheme isn't operating, such as mental health, are losing out as money is pulled away towards those areas that do."
Dr Jonathan Fielden, chairman of the BMA's Consultants Committee, said the reform tended to be used as a "blunt financing tool".
"We need better mechanisms to ensure that quality is the driver and financial activity is aimed towards improving patient care."
"Clinicians must have a greater role to facilitate improvements in decision-making and the planning of patient services.
"There is some evidence that it may interfere with clinical judgement where trusts have put finance ahead of patient care."
A spokesman for the Department of Health said: "We welcome this report, which recognises the progress and benefits of Payment by Results."
She said that consultation on any changes to the scheme would involve clinicians.