The NHS Redress Bill, planned for 2007, would streamline payments and save millions in legal fees, according to the Department of Health. Jane Kennedy, a health minister, said yesterday it aimed to stop a US-style compensation culture developing.

By investigating complaints speedily and offering apologies and payment where appropriate, ministers hope the scheme will win public support. The existing scheme has been condemned as outdated, bureaucratic and unfair.

In 2004-05, the NHS settled negligence claims worth £503m, of which £150m - the cost of building a small hospital - went on legal fees. Most patients waited years for payouts.

Ms Kennedy said: "The Bill means fairness for patients, not fees for lawyers. In any healthcare system, things sometimes go wrong. As things stand, many patients have little alternative than the courts.

"We need to move from responding to clinical negligence [with] variations in outcomes, long and complicated processes and legal costs that often exceed amounts paid to patients."

The scheme means NHS trusts must review errors and start inquiries where necessary. Patients will no longer be responsible for starting claims, though they will still be able to.

Investigations will be overseen by the NHS Litigation Authority, and will cover claims up to a limit expected to be £20,000. This could cover compensation for pain and suffering the injury caused, extra length of time in hospital and loss of earnings.

Patients would be offered independent legal advice and would be free to take legal action on their own at any time up to the payment of compensation. A spokeswoman for the Department of Health said research showed most patients who suffered problems with their care did not seek compensation. "What they want is someone to admit they made a mistake and to ensure things are changed so it doesn't happen to others."

Medical defence organisations said that doctors should not be blamed because of system failures in the NHS which were the fault of many people. Stephanie Brown, of the Medical Protection Society, said that a balance must be struck between rigorous investigation and speedy resolution.

"An investigation that fails to consider all aspects of care could lead to doctors and healthcare professionals being unfairly criticised and patients left without the full facts. This would undermine confidence ."

Clinical negligence claims against the NHS have soared to £5bn, to be paid out over years as claims are settled. In 2003-04, the NHS Litigation Authority took 6,251 new claims.