Hospitals treating patients in mixed-sex wards will be fined from April next year, health secretary Alan Johnson announced today.
A proportion of trusts' payments will be deducted if mixed wards are used other than where there is 'overriding clinical justification'.
Trusts have been told to submit plans for changes to strategic health authorities, which will pass them to the Department of Health by the end of February.
The government is making£100m available for the changes. However, the Conservatives have costed the elimination of mixed-sex wards at£1.5bn.
The NHS Confederation has previously said the total could be even more as, in some cases, new buildings would be required.
Mr Johnson said: "I want to make clear today that mixed sex accommodation is no longer tolerable in the NHS, except when it is absolutely clinically necessary.
"Such accommodation is totally incompatible with our focus on quality, let alone the dignity and respect agenda, and it also now contravenes the NHS constitution.
"I recognise there are real and practical difficulties that some trusts are struggling to overcome, so I am setting up a privacy and dignity fund of£100m centrally that will enable SHAs to make swift adjustments over the next six months, and I will expect all of them to monitor progress as we make the final push to eliminate mixed sex accommodation.
"And from 2010-11 hospitals who fail in their duty to protect patients' privacy by allowing mixed sex accommodation where it is not clinically necessary, will be financially penalised."
Shadow health secretary Andrew Lansley, who has said the Conservatives would provide£1.57bn over five years to guarantee single rooms to patients who want one, said: "Unfortunately for patients, Alan Johnson's new plans fall far short of what the NHS needs.
"If Labour were serious about stopping patients being forced to share wards with the opposite sex they would copy our pledge to double the number of single rooms in the NHS.
"Patients will be rightly worried that today's announcement will be the latest in a long line of broken promises from Labour on mixed sex wards."
Mixed-sex wards have been a high-profile political issue for several years and in 2001 Labour's manifesto promised to eliminate them.
Last week a leaked email from NHS South East Coast chair Graham Eccles, sent following a meeting with Mr Johnson, said the health secretary had been "rattled" by the Conservatives on the issue.
Making his announcement at an NHS Confederation conference for chairs today, he joked: "You don't have to send and email about this conversation, we will be publishing my speech."
A spokeswoman for Mr Johnson said exceptions to the rule would be clearly defined between primary care trusts and providers. They would include intensive care units and accident and emergency.
PCTs would be expected to decide how much trusts should be fined based on a sliding scale defined in the contract.
She said mixed-sex treatment could be "virtually eliminated", and the£100m privacy and dignity fund was expected to pay for necessary changes to premises.
NHS Confederation policy director Nigel Edwards said there were "issues the NHS will have to deal with to make this happen".
“Providing single sex accommodation across the board could well have an impact on other priorities we are working towards in the NHS like faster turn-around times in accident and emergency and waiting times for surgery," he said.
"Financial penalties for treating patients may well have the effect of focussing attention on this issue but leaders in the NHS are already aware of it and working hard to deal with it."
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