By Nick Triggle
Health reporter, BBC News
Hospitals are facing a squeeze on their funding
Hospitals are facing the prospect of cuts over the next four years as part of a squeeze on NHS finances.
The amount they are paid for treating patients is to be frozen until 2014 as part of the government's productivity drive in England.
Health Secretary Andy Burnham said hospitals would have to start working differently, but added it would not necessarily mean hospital closures.
Hospital bosses described the task facing them as a "pretty tall order".
The freeze in hospital income was included in a five-year plan set out by Mr Burnham following the pre-Budget report on Wednesday.
He said the NHS was facing an "unprecedented productivity challenge" in the coming years.
Many predict between £15bn and £20bn needs to be saved from 2011 to 2014.
The budget will rise by more than 5% next year, but after that rises look likely to be much smaller as the government seeks to curb its spending to pay off debts.
The health service has been told it will get above inflation rises after 2011, but that could still feel like a cut for the NHS as it struggles to cope with demands from an ageing population and higher than inflation rises in the cost of equipment and drugs.
But while the NHS will be getting more as a whole, hospitals are facing a freeze in a major part of their income.
About 70% of hospital funding comes through a system known as payment by results.
It means hospitals are paid per patient treated rather than under the old method whereby they would get a lump sum based on traditional levels of activity.
The government introduced the system to make the NHS more competitive and it now applies to everything from hip operations to doctor consultations - only the most unpredictable parts of treatment, such as intensive care, are excluded.
Mr Burnham acknowledged the move was designed to ensure more patients are treated in the community, which is much cheaper than caring for them in hospitals.
"It is going to be tough... hospitals will have to change."
He suggested they could start working with other parts of the NHS to take services into the community - some senior doctors already run clinics in community health centres.
But he added it was "not correct" to assume there would be hospital closures.
Among the other measures set out by the health secretary was a plan to link NHS funding to patient satisfaction.
From 2012, the budgets of hospitals, GPs and other parts of the health service will be directly dependent on patient surveys.
Mr Burnham said he hoped in time patient ratings could account for up to 10% of the budget to help create more "patient-centred" care.
He also said he wanted to explore the idea of job guarantees for staff in return for accepting pay caps and the need for greater flexibility.
Nigel Edwards, of the NHS Confederation, which represents health managers, said: "The NHS has never before been asked to do something like this.
"It is a pretty tall order and we haven't got all the answers yet."
He said hospitals may have to close beds and even buildings, but that did not necessarily mean there would be poorer care.
"If general practice and hospitals work more closely we can reduce emergency admissions among patients with conditions such as diabetes. It is about working differently."