One in five NHS hospital trusts is likely to report large budget deficits in the near future, with a "real risk" that many of them will fail, a new report warns.
The King's Fund finds that the introduction of market competition into the NHS is likely to cause considerable financial destabilisation, and that currently the service is "ill-placed" to deal with this without damaging patient care or requiring more of taxpayers' money.
The report comes after health secretary Patricia Hewitt admitted last week a £620 million deficit in NHS trusts was expected at the end of the financial year.
Management 'hit squads' are being sent in to help the worst-performing NHS trusts balance their books, but yesterday Ms Hewitt said operations could be cancelled in order to cut costs.
Under questioning by the Commons health committee, she confirmed some trusts were postponing non-urgent procedures until the next financial year in April to try to balance this year's budget.
She said it was worrying for patients, but admitted that in specific circumstances, it would "make sense" to slow down procedures. However, she insisted no patients would have to wait more than six months.
And speaking on Newsnight later, Ms Hewitt insisted that the benefits of the extra funding put into the NHS were increasingly evident, citing reduced waiting times and lists.
"People can see the real improvements that are coming through in return for the extra investment that we have made," she claimed.
However, today's King's Fund report warns that the impact of the government's NHS reforms "will be to magnify financial imbalances at a significant number of trusts".
These reforms see more and more trusts managing their own financial affairs, while the increasing use of the independent sector to provide services and moves towards practice-based commissioning are reducing demand on many trusts, and with that, their income.
But the health service is "currently ill-placed to deal with the financial destabilisation intentionally caused by NHS reform", the report says, and recommends a more flexible financial regime be introduced to help trusts cope with budget problems.
This could include making the way trusts must pay back public dividend capital (PDC) - funding advances from the government - more responsive to a trust's financial situation.
In addition, it calls on trusts to have access to central funding for use in restructuring, and for them to be able to keep surpluses and reinvest them in health service provision - freedoms that foundation trusts already have.
But the think tank rejects short-term cost cutting measures such as postponing operations, warning they "displace and frustrate medium-term improvement".
The King's Fund also urges improvements on how failing trusts are dealt with - letting them go under harms both patient care and the taxpayers, while their problems are often not caused by poor management but by the costs of making up for years of past funding shortfalls.
In these cases, the government could lend trusts money in return for radical restructuring, such as closing certain services where there is no longer enough demand, and merging some trusts, the report says.
If these measures do not work, the King's Fund recommends that an NHS administrator be brought in to find a solution, and with it protect patient care and local services.