The Department of Health is to be turned into an "arms length" regulator of health standards in an attempt to release hospitals from the grip of central Government control.
The strategy, which ministers hope will reform the out-dated centralised nationalised industry culture dating back to 1948, is a candid admission by the Government that too much of the extra money they have injected into the NHS has been wasted.
In a significant U-turn, Mr Milburn is to recast his department, recognising that its many "top down" initiatives will not create the "world class" health service to which Labour is committed.
A senior Government source said: "There is a belief that there has been too much consolidation at the centre. Too high a proportion of the new resources have been spent on centralised initiatives and not local allocations."
He added: "The health department should no longer be pulling the levers and micro-managing the service. It should be a regulator which sets standards and incentives, identifies failures and tackles poor performance."
Mr Milburn has agreed his new strategy in talks with Tony Blair and the Chancellor, Gordon Brown, who is alarmed at wide variations in the performance of different hospitals and the cost of operations. The three Cabinet ministers have agreed to launch a new drive to lever up the standards of the worst hospitals, so they compare favourably with the best.
That could involve sacking poor managers and allowing successful managers to take over "failing" services in other authorities. "Jobs will be on the line if things don't improve but we will reward success," said the source.
The shake-up at the Department of Health will be greeted with scepticism by the Tories, who have accused ministers of creating a Soviet-style NHS through a series of "top- down" initiatives.
But Mr Milburn, who will outline his department's new role shortly, is determined to abolish what he calls "the command and control NHS". He wants to devolve decision-making and put control of purse-strings on a local level.
Mr Milburn also wants patients to have more information about the performance of different hospitals and will give them the right to have their operations carried out at the hospital of their choice – in the NHS, private sector or on the Continent--if they have been on the waiting list for their operation for more than six months.
The changes are seen as a step towards creating a "market" in health care that will encourage hospitals to improve their performance, even though Labour has abolished the "internal market" introduced by the Tories.
* Today, Mr Milburn will announce that an existing BUPA hospital will become the first of 20 new diagnostic and treatment centres. It will continue to be owned and managed by BUPA but the Government will foot the bills for any treatment of NHS patients.
The announcement will anger the trade unions and may have dashed their faint hopes that ministers had cooled on the idea of public-private partnerships after hinting strongly they will raise taxes to boost the health budget.