Ministers have launched a consultation into the nursery school free milk scheme, claiming abuse of the system means the Government is being billed up to £1 a pint.
Figures show that middlemen are charging around double the retail cost, meaning the Government is spending 92p on a pint of milk while most consumers can buy a pint for 45p.
A loophole in the system means the Government is obliged to pick up the bill, regardless of cost, submitted by firms that are acting as schools' go-between with suppliers. Last year, it was estimated that the difference in price costs taxpayers an extra £10 million a year.
One option that ministers are examining is to set up a system of national suppliers to cut out the middlemen. Another suggestion is to cap the price that childcare providers can claim for milk. The other alternative is to issue e-vouchers to providers.
Public Health Minister Anne Milton said: "Milk has many benefits to children's health and is important for their development - we are committed to continuing to provide free milk for all under-fives. But the current scheme has not changed operationally since it began and costs have ballooned.
"In four years, costs have jumped from £27 million in 2007 to a staggering £53 million in 2011. Estimates show that modernising how the scheme operates could save as much as £20 million each year. Everyone is encouraged to take part in this consultation and share their views on the proposed changes."
Plans to alter provision have proved politically explosive for the Conservatives in the past. In 2010 Prime Minister David Cameron slapped down suggestions by Ms Milton that the supply would be scrapped, saying he "did not like" the idea. In 1971 Margaret Thatcher earned the nickname "milk snatcher" for ending free school milk for the over-sevens while education secretary.
Every child under five receives a third of a pint of milk free of charge at school each day and the nurseries claim back the cost from the Government.
Shadow public health minister Diane Abbott said: "Trying to cut the cost of this scheme may end up snatching milk away from the country's children, disproportionately affecting the poorest. In a recession, which has been made in Downing Street, when there is a squeeze on families, it is the wrong time for risks with our children's health."
The School and Nursery Milk Alliance said that any change to milk schemes must be best for children and not financially driven. The organisation said some of the suggestions put forward by the Government could have a negative impact on the scheme.