At least 20 NHS trusts, including 17 major hospitals, are not fit for purpose in their current form and must either close, merge or risk becoming an indefinite drain on the public purse.

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Overall, one in five NHS hospitals is struggling to survive in the tough economic climate, according to an analysis by a government watchdog.

Up to a further 30 trusts are facing severe financial difficulties that make it unlikely they will achieve foundation status, giving them independent control of their futures, in line with the Government's ambition for all NHS trusts by 2014. The grim report by the National Audit Office (NAO) spells out for the first time the depth of the crisis in the NHS, which is struggling to maintain too many hospitals in the wrong places with the wrong specialties serving the wrong populations.

Andrew Lansley, the Health Secretary, yesterday published the list of the 20 most vulnerable trusts – which the NAO deems not clinically or financially viable – claiming they were a legacy of "unaffordable PFI deals", repeated bailouts and neglect by the Labour government.

His move came as the Government cleared a crucial hurdle in the Lords for its controversial Health and Social Care Bill, after a proposal by the Liberal Democrat peer Lord Owen to send the proposals to a special committee for further scrutiny was rejected by 330 votes to 262.

While his health Bill has survived, Mr Lansley faces mounting problems with the NHS. They are worst in London where local hospitals, overshadowed by the major teaching institutions, have struggled for years to balance their books and are finding they are unequal to the task.

Almost two-thirds of hospitals (62 per cent) in London have yet to achieve foundation status and many will not do so without long-resisted closures and mergers to rationalise services.

The difficulties were highlighted last month when Mr Lansley reluctantly approved the closure of the A&E and maternity units at Chase Farm Hospital in north-west London, amid fierce local opposition, 17 years after the changes were first mooted.

After last year's election, the Government set a target for all NHS trusts to achieve foundation status by 2013, later put back to 2014, as a cornerstone of its strategy to reduce top-down command and control management in the NHS and increase local autonomy. There are 252 NHS trusts in England, of which 139 currently have foundation status. Foundation trusts have the freedom to run their own affairs, borrow capital and develop services – which are not open to ordinary NHS trusts.

But the Government's plans are now threatened by a combination of historic debt, punitive interest charges on privately financed schemes and structural problems, which mean some may never be able to provide a clinically safe, high-quality service that is financially sound.

Mark Davies, lead author of the NAO report, said: "There are services that are being delivered that aren't good quality and may also be expensive. The process has defined those." The Department of Health had said it was working to assist trusts in difficulty, but Mr Davies said: "What can't be answered is what will be the solution in all respects."