Social enterprises are being allowed to take over £900m of NHS services without safeguards to ensure they save the taxpayer money and will not go bust, a watchdog warned.
And the high-profile initiative is at risk of being undermined by the government's own plans to increase competition within the health service, it suggested.
The National Audit Office (NAO) found the "many risks" involved in handing control to bodies set up by groups of staff were not being adequately addressed by the Department of Health (DH).
Vague contracts failed to require them to deliver better value than alternative providers and little provision had been made to deal with them failing, it said in a report.
Insufficient attention had also been given to the consequences of the groups going bust when they were forced to compete more widely with the private sector under NHS reform plans.
But the watchdog was met with an angry response from the government, which accused it of "failing to understand the point of this initiative".
Cabinet Office Minister Francis Maude has championed the right of public servants to form mutuals or social enterprises to run services, with the aim of one in six having done so by 2015.
Only 20 are operational in the health service so far but another 30 are expected to have begun work by September, delivering around £900m of services.
Copyright © Press Association 2011