Health chiefs are to assess options for the future of services in a town after admitting a scheme to build a new hospital is not "robust enough".
An independent review suggested plans for a new hospital and to replace two GP surgeries in Alcester were "unlikely to offer value for public money".
NHS Warwickshire and local doctors said they carried a risk that could potentially affect services.
The Mayor, Eric Payne, said residents feel disappointed and despondent.
Public meetings
NHS Warwickshire admitted it has the potential to be a very unpopular decision, but it is a "responsible" one.
It said it received advice that the deal was "unlikely to offer value for public money because the ownership of the hospital would remain with Alcester Doctors Consortium (who are running the project) at the end of the lease term".
In a joint statement with the consortium, it added: "Under a typical public private partnership arrangement, the ownership of the asset would revert to the NHS.
"The scheme in its current structure carries a risk that could potentially affect the services available to local residents and this is not a risk that Alcester Doctors Consortium or NHS Warwickshire are prepared to accept."
NHS Warwickshire said there will be public meetings during May and June and it hopes to have a plan for services that is widely known by October.
Mr Payne said: "We're right back to where we were 20 odd years ago. I feel like the rest of the residents... we just feel that it's not going to happen."