Controversial changes to the way hospitals are paid worsened the multi-million pound cash crisis engulfing Bradford's Foundation Trust, it was claimed today.

The Audit Commission said 'payment by results' had added to the hospital's £11.3 million financial black hole.

Nationally the Government reform to NHS funding will run up £50m in administration costs, with each organisation spending an average of £100,000 according to an Audit Commission report out today.

Under the new system, Bradford Teaching Hospitals - one of the first to be granted foundation status - receives a set sum from primary care trusts for each individual treatment doctors carried out.

In the past, hospitals were given a lump sum regardless of how many operations it carried out. The Audit Commission said some hospitals were seeing a "positive change" because health bosses were able to balance budgets better.

However, the majority were still "grappling with the complexity of the system" leading to crippling financial disputes between hospitals and PCTs, it added.

In his report, Andy McKeown, the commission's managing director for health, said: "The well-publicised events at Bradford Teaching Hospitals NHS Foundation Trust serve as a timely reminder of the financial risks and instability that the new financing regime can generate for individual

organisations. While payment by results was certainly not the only factor behind the difficulties experienced at Bradford last financial year, it was an important catalyst, exacerbating existing weaknesses in financial management and information systems."

Monitor, the foundation hospitals watchdog, was forced to intervene after debts spiralled at Bradford. Mr McKeown added: "A number of different factors contributed to Bradford's deteriorating financial position, but many relate to payment by results and the change in organisational culture and management that the new financial environment requires."

Health chiefs had been too "optimistic" when they estimated the number of treatments they would receive from PCTs and mistakenly employed an extra 300

staff. Mr McKeown also said data quality was an issue and the Trust suffered from invoicing problems, which triggered a series of disputes with the PCTs.

In a damning conclusion, Mr McKeown said: "The Trust failed to change its culture in response to the new financial environment. There was a lack of understanding about how foundation status and payment by results profoundly changed the way in which the system operated and, therefore, the way in which the hospital had to be managed."