MPs warn the 'malicious prosecution' of an independent mental health unit will deter entrepreneurs from opening care facilities

MPs are demanding an independent inquiry into a "bungled" NHS fraud investigation that cost millions of pounds, dozens of jobs, and needless patient suffering, as well as forcing the Solicitor General to publicly apologise on behalf of the Crown Prosecution Service.

Cawston Park Hospital in Norfolk was set up in 2003 by Andrew Breeze, a psychiatric nurse with 30 years' experience, to provide an innovative service for seriously ill patients the NHS was unable to help.

The independent psychiatric hospital saved the NHS an estimated £1m a year, and was highly praised by patients and professionals. Its philosophy and staff enabled people to reclaim their lives after years of self-harm, and desolation in locked wards.

In 2009, the hospital went into administration after a three-year NHS Counter Fraud and Norfolk Police investigation into allegations brought by a disgruntled former employee. The hospital directors were alleged to have charged the NHS for care that was never provided. The investigations, which included a high-profile raid by 50 officers from a force with no fraud specialists, cost the taxpayer £2m.

What Norman Lamb, the Liberal Democrat MP for North Norfolk, calls the "shocking demise" of the unit, left Mr Breeze £9m out of pocket. His plight will act as a deterrent to socially-minded entrepreneurs, warn MPs.

The Government wants to encourage small businesses, social enterprises and mutuals as part of its plan to roll-out the "any willing provider" philosophy across the public sector, especially in areas such as mental health, where the NHS has a poor track record.

Last month, during a Commons adjournment debate tabled by the Tory MP Steve Baker, the Solicitor General, Edward Garnier, apologised on behalf of the CPS for bringing the Cawston case to trial and admitted the "prosecution should never have got as far as it did". Norfolk police and NHS Counter Fraud insist they followed procedures despite criticism of their reliance on a "malicious" complaint, failure to bring in proper experts, and case disclosure issues.

"I am deeply concerned that exactly the same thing could occur to other entrepreneurs," said Mr Baker. "There have been no external reviews across the organisations concerned, so no lessons have been learned."

Mr Lamb, who described the investigation as "bungled", agrees: "We need people who are motivated by high-quality care to take risks and open up facilities. But we have to demonstrate to people that lessons have been learnt from this shocking case."

Mr Breeze, 57, has had no work since the case was thrown out of Ipswich Crown Court in June 2009, although the judge told him and his co-accused: "You leave vindicated with your good name in tact and your heads held high."

"All I wanted to do was run a respectful service for those who the NHS had given up on," Mr Breeze said. "I welcome the CPS apology, but I still don't know why things went so wrong. This has been a tragedy for me, but a much bigger tragedy for those patients who had to go back to NHS facilities from where they had been liberated."

The Secretary of State for Health, Andrew Lansley, announced plans last week to give NHS staff the right to set up organisations to provide care as employee-led mutuals. Mr Lansley said he wants to "hand power and responsibility to the front-line".