Emergency admissions will be covered by the scheme

From April NHS trusts will be paid per patient treated for most of their work, rather than getting a lump sum regardless of activity as they do now.

The Audit Commission said the changes had the potential to disrupt finances, leading to ward closures, after studying how foundation trusts adapted.

But it said the changes should go-ahead as they would modernise the NHS.

Foundation trusts started using the new system - called payment by results - in 2004 as part of a five-year phasing in of the changes.

All the evidence from countries which have introduced systems similar to payment by results is that it will ultimately lead to improvements in efficiency Nigel Edwards, of the NHS Confederation Q&A: NHS reforms Will shake-up be disasterous?

Acute hospitals are currently using it for elective surgery - about a third of their workload - but it is due to be rolled out to most of the other services such as A&E from April.

The government is introducing the new system to increase efficiency by rewarding hospitals which do the most work.

The public sector watchdog analysed the impact of the system on 10 foundation trusts and local health bosses with responsibility for commissioning services.

It found that productivity and efficiency had not increased despite it costing �100,000 for each trust to implement and there was some evidence the changes had destabilised finances.

Finances

In one example, the report cited the case of the foundation trust in Bradford which got into financial difficulties.

The report said a number of factors caused the problem, but payment by results played a part as the trust misjudged the effect of the changes on its income and workload.

It added hospitals needed to prepare for the changes by improving financial management, making sure all staff understood the new system and ensuring good data was available on what was happening within the hospital.

It also suggested the government look at making the tariff system for emergency treatment more flexible.

Officials said it was still early days but in the worst case scenario ill-prepared hospitals could be forced to close wards if finances were destabilised.

Audit Commission chairman James Strachan said: "There are real dangers for the NHS in the short term."

But he added there should be no slow down in its implementation as it was "fundamental to the modernisation of the NHS, providing a potentially powerful set of incentives and underpinning patient choice".

The Department of Health said officials had already started work on learning the lessons highlighted by the report.

And Nigel Edwards, director of policy at the NHS Confederation, which represents health service managers, added: "All the evidence from countries which have introduced systems similar to payment by results is that it will ultimately lead to improvements in efficiency."