Lawyers will have to bid competitively for all legal aid work generated by groups of police stations in England and Wales under new proposals.
Solicitors are currently paid by the hour for legal aid work
This would end the long-standing arrangements where solicitors are paid by the hour for legal aid work.
Lord Carter of Coles said his plans were a "significant departure" from the current system which he said "provided little incentive to work efficiently".
Legal aid costs have risen from £1.5bn in 1997 to £2.1bn currently.
Law firms would bid for contracts covering a group of police stations.
If suspects from the stations were charged with a crime, the same firms would be responsible for defending them in magistrate and Crown Court cases - apart from some exceptions.
Lord Carter, who is reviewing the legal aid structure, said it would lead to fewer law firms taking on legal aid work.
He said £90m was spent on paying solicitors for travelling time and for waiting time in police stations and magistrates' courts in 2004 - 2005.
Under his plans, solicitors, who win the bid for work from police stations, would receive a block grant for the contract.
Defence services in magistrates' court cases would be paid a fixed fee per case.
The firms holding these legal aid contracts would also be responsible for most Crown Court cases, except where they were of very high cost and lengthy hearings.
Lord Carter estimated if police stations were grouped together in "clusters" there could be 450 different contract areas for the work, ranging from £100,000 a year to £750,000.
He said the reforms should be introduced in three phases between April 2007 and October 2008.
The Bar Council welcomed the report as an "important first step", but warned any changes had to be properly financed.
Bar Chairman Stephen Hockman QC said criminal barristers doing most cases had "endured a 10-year pay freeze" which had cut incomes by at least 25%.
"There is a pressing need to redistribute income to the most junior barristers doing 1-10 day cases," he said.
Tom Little, chairman of the Young Barristers' Committee of the Bar Council, added: "The young barristers I represent are struggling to make a living on the derisory pay rates prevailing under the existing system, which sees as little as £46.50 paid for a hearing that can take hours to prepare."
They welcomed the proposals but were disappointed they still could not see what money would be available, he said.