Acute and teaching hospitals face losing millions of pounds, putting services 'in danger', because of the switch to service agreements and out-of-area treatments, trust finance managers warned this week.

The problem is most severe in London, which has a large number of teaching hospitals providing specialist services.

Barry Elliott, chair-elect of the Healthcare Financial Management Association, said the old extra-contractual referrals system 'guaranteed' payment for work done - while the new system is based on historic levels of funding: 'Because the process was not tightly managed, people have played the game to their own advantage.'

Health authorities had insisted on using figures from up to two years ago as a baseline for funding 'regardless of what has happened since', and ignoring increases in the number of patients treated, Mr Elliott added.

Mr Elliott said his own trust, Bart's and the Royal London, had lost£1m and stood to lose another£1m 'because of the way HAs have chosen to redistribute the money from ECRs into service agreements and out-of- area treatments'.

Barbara Ghobse, service agreements manager at St George's Healthcare trust in south London, said the hospital's specialist pelvic reconstruction service was in particular difficulty.

'The funding we have is based on the 1997-98 spending, but the service grew in 1998-99, and if it continues to grow this year we are in trouble. Every trust has a list of services that are under threat as a result of the change,' she said.

Commissioning arrangements introduced under the reforms for specialist services at regional level 'should help but they are not in place yet', she said.

'This year is almost like the start of the internal market in 1991, a transitional period covering a huge change in the system and none of us knowing quite how it will work,' she added.

Mr Elliott said there was a 'real danger' that this year would see trusts 'increasing deficits and losing services' because of the change in financial systems.

University College London Hospitals trust is facing a£3.5m deficit, partly as a result of the change. Acting finance director David Wragg said HAs were refusing to fund the full cost of the trusts' services under service agreements and 'we are still£2m short of achieving that figure'.

'Ultimately, if the NHS Executive says we have to go with what the HAs are offering, we would have to cut services, reduce activity and cut costs.'

The new system moved the risks of paying for increases in demand from HAs to trusts, he added.