All hospitals would have control over their own spending
Instead, an NHS Corporation should run the health service, distancing the management of the service from Whitehall, says the King's Fund in its report 'The Future of the NHS'.
The report, written by a team headed by Labour peer Lord Christopher Haskins says the NHS currently suffers from too much political control and centralisation and too little responsiveness to patients' needs.
It says the current system draws the government into being responsible for "every dropped bedpan".
It would work in a similar way to the Environment Agency or the Higher Education Funding Council.
The government would be left to concentrate on providing funding and controlling health policy.
Patient choice
The report says this would eradicate any chance of conflict between ministers' need to show how successful their policies are and achieving change within the NHS.
It points to the recent furore after a National Audit Office Report found some NHS trusts had manipulated waiting list figures to meet government targets.
Under the plan, put together by leading health thinkers, hospitals and other local bodies would become not-for-profit organisations, with complete control over how they use their assets but remaining under public ownership.
Patients should also have more impact on how the NHS works, such as giving them more choice about where how, and by whom they are treated.
For the proposed structure to work, the King's Fund say a robust regulatory system would be essential.
Lord Haskins said: "The NHS is not in crisis. It is not on the verge of collapse. But it does suffer from excessive political control, too much centralisation of power and a lack of responsiveness to patients."
Rabbi Julia Neuberger, chief executive of the King's Fund, added: "The government has said it wants to devolve power within the NHS, and has begun to do this in some cases.
"It is vital however, that decentralisation happens across services, not just in the best NHS trusts, and that it is protected over the long-term."
She added: "The NHS should be freed from political control of its day-to-day workings. Local NHS organisations should be able to manage their assets without interference from the centre and without the constant threat of reorganisation.
"They should be accountable directly to the people they serve, both locally and through Parliament. And they should be able to offer patients genuine choice about how they are treated."
'Damning report'
A spokesman for the Department of Health said many of the reforms outlined by the King's Fund were already happening.
He pointed to the recent announcement top-rated "three star" hospitals are to be self-managing, and that day-to-day running of the NHS is to be delegated from the centre to the 28 new strategic health authorities in England, which will begin operating in April.
He said: "The NHS needs less interference from Whitehall and more freedom to get on with improving patient services.
"In fact Mr Milburn's proposals last week actually go further than the King's Fund recommendations."
Dr Evan Harris MP, Liberal Democrat health spokesman, said: "For the government's own advisor on bureaucracy to admit that the NHS is suffering from too much political control, too much centralisation of power, and a lack of responsiveness to patients is a siren call for Alan Milburn to start listening to NHS staff and allow them to get on with the job."