Money will be withheld from hospitals unless they give patients the best care possible under plans unveiled by the NHS's top doctor.
New organisations that control £65 billion of health spending will have the power to hold back part of the fees for operations if they feel a patient has not been treated to the highest possible standards, the Guardian said.
The financial penalties form part of a major shake-up of the NHS which sees the introduction of GP-led clinical commissioning groups (CCGs).
They have been outlined by Professor Sir Bruce Keogh, who on Monday becomes the national medical director of the NHS commissioning board, which takes over the day-to-day running of the NHS in England from the Department of Health.
The fines are being implemented to force hospitals to provide high-quality care and to embrace the latest medical thinking and guidance on how to manage particular conditions, such as strokes or heart attacks, Sir Bruce said. If they do not they will forfeit part of the payment for an operation from the CCGs.
"The idea is that the CCG would say, 'We will withhold a certain amount of payment from you until you can demonstrate that you've met these standards'," Sir Bruce told the newspaper. "So it's a bit like the building industry - you pay 90% of the (cost of) the building up front, and then the final payments comes a bit later, when you're sure everything is OK."
But such penalties should be regarded as carrots, not sticks, he said, adding that: "So the idea for commissioning quality and innovation is to withhold a little bit of money. It's not a penalty, but it's an incentive to make sure that people reach a set of standards."
Sir Bruce also wants to explore a similar system to tackle differences in care by GPs, with a slice of the money received by a GP practice depending on how many patients are diagnosed correctly or how many end up in home-based care rather than in hospital.
The NHS Confederation, the body representing hospitals, voiced concern over the plans, saying it would rather see high-performing hospitals receive a bonus than penalties against weaker performing ones.
Mike Farrar, the NHS Confederation's chief executive, told the Guardian: "Bruce is right that commissioners (CCGs) need to use levers. But the downside of penalties is that if hospitals don't reach the standards set, then they don't get the rest of the tariff fee and the risk is of a downward spiral in which they have less resources next year in which to try and meet the standards."