Leading article: An unhealthy service in dire need of surgery

Each day brings more evidence that the National Health Service is slipping into a financial crisis. A quarter of NHS trusts are heading for a deficit, and the service as a whole is facing a £620m shortfall. This week we learnt that the Government is reviewing all private finance initiative hospital-building schemes on cost grounds. Approval of a £1.15bn PFI scheme to develop St Bartholomew's and the Royal London Hospital has been delayed as a result. The Government also appears to have scrapped an incentive scheme to encourage female GPs to return to work after childbirth, on the ground of expense - despite the fact that there is a chronic shortage of working GPs.

The situation is about to get worse. The NHS has enjoyed unprecedented, and welcome, levels of public investment in the past six years. The UK is on course to equal the European Union average for health spending by 2008. But a leaked Treasury document has confirmed what we long expected: the funding taps are about to be turned off. Spending will slow dramatically after 2008. This was confirmed yesterday by the Health Secretary, Patricia Hewitt. Yet the financial crisis in the NHS is not going to resolve itself in the space of two years. There will be pressure for the spending splurge to continue. But will the Government be able to afford this without raising taxes? And will the public be willing to see more of their money poured into a failing system?

If the crunch is to be avoided, the first thing the NHS must do is implement more stringent spending controls. NHS trusts have clearly not been spending within their means. Drug purchasing is one area where economies must be made. The UK is paying more for branded drugs than most other European countries. France, Italy, the Netherlands, Austria and Belgium all pay around 20 per cent less than Britain. Doctors' pay should also be brought under control. British GPs and hospital doctors are now the highest paid in the world, outside the United States.

A much greater level of competition must be introduced. The NHS still functions as a monolithic and inefficient health provider. And there are still huge variations in levels of activity between hospitals, in terms of both their costs and efficiency. Greater competition will force poor hospitals to improve. This means more payment by results for individual hospitals and greater patient choice. The internal market reforms introduced so far have been too timid.

There needs to be more private-sector involvement in the NHS. So far, a few independent treatment centres have opened, forcing a handful of hospitals to raise their game to compete. But there must be more diversity of provision. Britain needs more private treatment for NHS patients. Partnerships between the private sector and foundation trusts ought to be allowed to take over failing hospitals.

The present state of the NHS is a cause for concern. When the Government launched the NHS plan six years ago, we were promised that the extra spending would be accompanied by reform. These promises have been broken. Billions of pounds have been channelled into an inefficient and poorly run service. Improvements in the service have been much more modest than we might have expected and the system is now on the verge of financial meltdown due to lax spending controls and poor productivity. It is time for the Government to face down those with a vested interest in maintaining the NHS status quo and push through these necessary reforms. Otherwise the unprecedented increases in spending of the past six years will be remembered as the greatest squandered opportunity in the history of the NHS.