Health Secretary Alan Johnson has revealed the government will not force through a third phase of private clinics to do NHS work.
Instead, he said local bodies will be able to decide if they want further Independent Sector Treatment Centres (ISTCs) in their areas.
The controversial centres have sparked accusations they make profits from easy procedures, and leave the most difficult ones to the NHS.
Mr Johnson also announced that a contract with Atos Origin, a private company which supplies the NHS with diagnostic services in the North West and South West, is being terminated.
The Department of Health said the decision was made because the firm is “not in a position to meet the contractual conditions and establish services to the timescales agreed”.
The Strategic Health Authority will use current contractors for the services, and “patients will not be affected”, it added.
Mr Johnson said: “Where independent sector providers are not offering good value for money or high-quality patient care, we won’t shoehorn them into the NHS.
“Atos have failed to meet certain conditions within the contracts within an acceptable timeframe, so the contracts have been terminated.
“Where they meet the tests we will bring them in, where they are inefficient we will terminate.”
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