Government seeking additional providers to offer further capacity and then take over contract, leaked DWP review says

The government is preparing to oust Atos Healthcare from its £500m contract administering millions of fit-for-work tests for sick and disabled people, according to documents seen by the Guardian.

A leaked Department for Work and Pensions (DWP) financial review says ministers across government are working together to build up competition to the multinational company by commissioning other private firms to add "further capacity" to the assessment system. The DWP will then enable "these providers to take over the whole contract" from Atos after the present agreement expires in 2015.

Atos has become the lightning rod for widespread public and political anger over the health test, known as the work capability assessment. The test has been criticised by MPs and campaigners as crude and inhumane, amid mounting evidence that hundreds of thousands of vulnerable people have been wrongly judged to be fit for work and ineligible for government support.

Ministers have been in private discussions with the company since the summer over the quality of its operation. Last week the disability minister Mike Penning told MPs that Atos's work had caused "real concern" because too many people appeal against their decisions.

Penning also said the current contract setup, with a single company holding a monopoly on the contract, was "flawed". He was responding to the Liberal Democrat MP Mark Williams, who said complaints from his constituents about the work capability tests had reached a "head of steam".

"I'm not just getting constituents …coming to me but actually I'm getting them saying the DWP themselves are saying 'go and complain to your MP'. Surely at that point we have to ask if the system is working in the appropriate way? We are talking about some of the most vulnerable people after all," Williams said.

Labour introduced the work capability assessment in 2008 to stem the rise in new incapacity benefit claims, and the coalition rapidly expanded the scheme in 2010 to reassess all 1.5 million people on sickness benefits, despite a warning from the government adviser Malcolm Harrington that the tests should be improved before being rolled out.

Last year the work and pensions select committee said the government's handling of the assessment was "damaging public confidence" and causing claimants "considerable distress". The committee said the problems with the computer-led, points-based assessment "lay firmly with the DWP", but added that the department was failing to apply "sufficient rigour or challenge to Atos".

More than 600,000 appeals have been lodged against Atos judgments since the work capability assessments began, costing the taxpayer £60m a year. In four out of 10 cases the original decisions are overturned.

High-profile cases include people who reportedly have been found fit to work despite having debilitating terminal cancer, and instances of people who have been pursued for examinations while they have been lying in a coma.

Private providers likely to be in the frame for the next contract – the current one is worth £115m a year – include G4S, Serco, A4E and Capita Group, who are all listed on the government's existing "framework" group of preferred bidders for outsourced welfare work.

Marked "restricted", the 80-page DWP efficiency review says: "The department is working with Her Majesty's Treasury and Cabinet office colleagues to seek additional [health assessment] providers to offer further capacity in the short-term and for these providers to then take over the whole contract."

It goes on to say that civil servants are "involved in ongoing discussions with Atos Healthcare regarding the quality of the service delivered".

An Atos spokeswoman described the contract as "outdated", saying that in its current form it wasn't working for "claimants, for the DWP or for Atos Healthcare".

She said: "The department has made it clear that it is considering bringing additional providers on board. We recognise that many people have strong feelings about work capability assessments. The constant flow of criticism inevitably has an impact on our staff who diligently endeavour to carry out assessments as laid out in DWP guidelines. We are committed to working with the department to help them meet their needs and the needs of claimants."

The admission that the government is planning to oust Atos would appear to be a contravention of public competition and tendering rules – a quasi-judicial process in which government bodies cannot favour one company over another before contract bids are entered.

One expert in competition law at a London firm specialising in commissioning practices said public procurement required contracts to be awarded on a fair and non-discriminatory basis. The legal expert who did not want to be named, said: "In short, if you have decided up front that you're going to exclude so-and-so, that's likely to be unlawful."

Last month the Atos boss Joe Hemming told a Commons committee that the company was proud of its work. "We have a real passion for delivering services to the citizen in a way that continues to satisfy the way the citizen wants to be served," he said. The Labour MP Paul Flynn accused Hemming of suffering from a "reality problem".

A DWP spokesperson said the department did not comment on leaked documents, but told the Guardian there was no breach of public procurement rules.

"In July we announced Atos had been instructed to enact a quality improvement plan to remedy the unacceptable reduction in quality identified in the written reports provided to the department," the spokesperson said. "We also announced in the summer we will be bringing in additional provision to deliver work capability assessments with the aim of increasing delivery capacity and reducing waiting times."

They added that a forthcoming "invitation to tender" would set out that "the quality of assessments and service delivery is central" to the system.