Providers will lose hundreds of millions of pounds in income under Monitor and NHS England plans to raise the efficiency assumptions that govern how much they are paid under tariff.

In a joint announcement today the two bodies said they planned to increase the proportion of tariff payments withheld from providers as an incentive for them to lower costs.

This proportion to be retained by commissioners will be raised from 1.5 per cent at present to 1.9 per cent in 2014-15.

Foundation Trust Network chief executive Chris Hopson said: “Giving more money to commissioners at the expense of providers increases risk significantly where it most counts – at the sharp end of NHS service delivery.

“Trusts will want to know how reducing their income will help them manage the quadruple whammy they are facing - implementing the Francis inquiry’s recommendations on quality such as improving staff to patient ratios, putting seven-day working in place, coping with increasing demand and investing in much needed change.

“The level of efficiency savings the NHS has delivered over the last three years is unprecedented, but this level of performance cannot be sustained year on year till 2021. We need a reality check here – in the end you get what you pay for, and trusts can’t perform miracles out of thin air.”

He added: “We want to see where this lost money is going. If it reduces the demand for trust services or comes back to trusts to recognise increased demand, that will help but we are deeply concerned at today’s announcement and will be looking for changes between now and the final tariff publication in December”.

Monitor and NHS England also said they planned to encourage local price setting and hoped to finalise their proposals in December and they would come into effect in April 2014.

Adrian Masters, managing director of sector development at Monitor, said: “Our proposals for the payment system in 2014-15 are designed to help commissioners and providers address the key challenges facing NHS care in their localities.

“We are offering them more freedom to encourage the development of new service models, maintaining incentives to provide care more efficiently and providing greater financial certainty to underpin effective planning for patients.”

Chief financial officer at NHS England Paul Baumann said: “Providers and commissioners face a major task in constructing robust plans for 2014-15 onward which secure clinical and financial sustainability in increasingly challenging circumstances. 

“To help them succeed in this task, we are proposing tariff arrangements for 2014-15 which provide the maximum possible continuity. Meanwhile we will be taking forward our work on longer term pricing strategies to support our emerging strategic priorities and incentivise improved outcomes for patients.”