The NHS is entering the latest and most risky phase of reform: the improvements in care that have been brought about since the NHS Plan in 2000, such as shorter waiting times for operations and more staff, have sprung from government targets and extra spending; in the next phase improvements are expected to be driven by giving patients a choice of treatments and increasing competition among healthcare providers, including NHS trusts and independent healthcare organisations.

Since January, patients have been able to choose from four acute hospitals for an outpatient appointment and operation. And this month saw the start of a new tariff that pays hospitals for each item of work they do, rather than giving them a block amount.

Ministers hope this new pay system will encourage hospitals to be more efficient and to attract more patients and treatment for less than the tariff. But trusts that have run up multimillion pound deficits over several years may not yet be ready to cope in this new marketplace for patients.

The reforms promise to further destabilise an NHS that is already struggling to recover a deficit of between £700m and £1.2bn.

A letter from the chief executives of four children's hospital trusts highlights the problems payment by results poses. In it, they warn that the new payment system does not adequately cover the costs of providing care in specialist hospitals, and would leave a £22m hole in their finances in the current financial year.

But general hospitals also face increased financial pressure under the new tariff: with the prices paid based on average costs, hospitals with high costs will have to become more efficient or run into deficit. And with patients being offered the option of treatment in the independent sector, NHS hospitals will have to compete on patient perceptions of quality of care - for example, cleanliness and MRSA rates - or risk losing income to alternative providers.

Another financial challenge for trusts is posed by the introduction of practice-based commissioning, under which family doctors receive funds to directly purchase hospital or primary care for their patients.

If GPs involved in practice-based commissioning can reduce referrals to hospitals by providing care closer to home, then hospitals will have to cut their costs in line with reduced income.

This poses a particular risk for hospitals that are locked into paying off annual charges on long-term contracts to build new facilities under the private finance initiative (PFI): with most of these charges fixed in advance, PFI-funded hospitals lack the flexibility to reduce capacity or sell some of their assets in order to bring spending into line with declining incomes.

In these circumstances, hospitals face a choice between seeking to increase their share of the market or, like the Queen Elizabeth hospital in Woolwich and the University College London Hospitals Foundation Trust, running up a significant deficit.

Taken individually, patient choice, payment by results, independent sector provision and PFI would not have a serious effect on the NHS; taken together, they are likely to lead to much greater uncertainty in healthcare planning and considerable instability in how funds flow.

Several policy experts have called for a more measured pace to these reforms, to give the health service time to adapt, but there is no indication that the government intends to heed their advice.

This is probably because, with a general election three years away, ministers want to get as much pain out of the way as quickly as they can so that the turmoil is but a distant memory by the time voters go to the ballot box. From that perspective, slowing the pace of reform would only postpone the day of reckoning to the point when the political costs could be much higher.

A further worry for trust chief executives is that the funding increases the NHS has enjoyed in recent years come to an end in 2008. While spending will continue to rise thereafter, it will do so at a much slower rate.

It is far better, then - so the theory goes - to deal with the challenges of transition to a market-based system when the NHS budget is growing at 7-8% a year than when it is increasing at only the 3-4% rate likely after the next government spending review.

In a recent speech, Tony Blair referred to this year as the "crunch point" of change, in which the government intended to hold its nerve and accept the short-term political costs of reform with the aim of completing the "revolution" that had been started.

The gamble the government is taking is that the instability its policies are generating will eventually deliver change that is more far-reaching than targets and spending can deliver on their own.

It is no exaggeration to suggest that the future of the NHS depends on the success of this gamble.

· Chris Ham is professor of health policy and management at the University of Birmingham