The NHS is losing more than £2bn a year through unnecessary emergency hospital admissions, inappropriate prescribing and other inefficiencies.
Wide variations in the way trusts manage their finances and services have been uncovered by the most detailed audit yet of the health service.
Health minister Andy Burnham warned that the Government could not and would not ask the public to support further increased spending on the NHS until it could demonstrate that current funds were being spent effectively.
He said that the statistics, which show the savings individual trusts could make if they performed at the same level as the best, threw down a challenge to tackle mismanagement.
The audit, called Better Care, Better Value, used a wide range of clinical and financial indicators to pinpoint where savings could be made if all trusts performed to the standard of the best 25 per cent.
It found that £975m a year could be unlocked by reducing the wide variations in the average length of time a patient stays in hospital. In the most efficient trusts, a patient with a broken hip will be in hospital for an average of 10.9 days, compared with 44.5 days in the least effective.
The report suggests that hospitals could reduce the length of a stay by improving the way in which they discharge patients, such as ensuring that medical tests are sent back on time, transport problems are sorted out and relatives and social services informed.
Almost £400m a year could be saved by reducing the number of emergency admissions, particularly among people with chronic conditions such as asthma and diabetes who should be treated within the community.
Increasing the rate of day case surgery and reducing the number of operations which research shows in some cases may carry little benefit for certain patients, such as tonsil removal, were also recommended by the report.
In total, improved productivity and efficiency within the health service could lead to an extra £2.2bn a year in resources.
Mr Burnham said: "The NHS delivers outstanding value for money in terms of health care, but it could be better, leaner, fitter. This is not about penny-pinching but there is an element of challenge to trusts here.
"We are putting £92bn into the NHS next year. We cannot go to the public and argue the case for more money until we can demonstrate that the NHS is using what it has already got to good effect."
The audit also shows the scale of the financial crisis facing the NHS, with a combined deficit of more than £600m. The Department of Health has said that all trusts should be heading for financial balance by the end of the year, but many have multimillion-pound debts that will make that task impossible.
More than 60 trusts expect to be in the red by the end of the financial year. Hillingdon Primary Care Trust in north London has the biggest deficit, with an estimated £54m hole in its accounts. A spokeswoman said that the accumulated debt could reach more than £60m next year.
She added: "We have had a lot of instability, with five chief executives in the last 15 months, but we now have someone who... is making those difficult decisions and is turning things around and we hope to begin reducing the deficit."
Nigel Edwards, director of policy at the NHS Confederation which represents more than 90 per cent of NHS organisations, said: "NHS managers know that as they step up their battle to improve value for money, they must increase productivity before they can make the case for extra government funding."
Meanwhile, the general secretary of Unison, Dave Prentis, told GMTV yesterday that the crisis in the NHS could cost Labour the next election. He claimed that more than 20,000 jobs in the NHS would go "in the next year" and said public demonstrations against the cuts and hospital closures would grow.
Operations in the red
* Hillingdon: £54.17m
* Kingston: £17.2m
* Carlisle and District: £16.09m
* Eastbourne Downs: £15.38m
* Guildford and Waverley: £13.05m
* Chelmsford: £11.6m
* Sutton and Merton: £11.5m
* South Cambridgeshire: £10.63m
* Kennet and North Wiltshire: £9.87m
* Suffolk West: £9.19mReuse content