The UK's first privately run NHS hospital generated a deficit more than twice as high than planned, it has emerged.
Circle, the company in charge of Hinchingbrooke Health Care Trust in Cambridgeshire, had projected that the trust would be in a £1.9 million deficit after six months under its stewardship, but in September it reported a deficit of £4.1 million.
The National Audit Office (NAO) said that while the private provider has made improvements in clinical areas a number of financial challenges remain.
Circle began it's 10-year management franchise at the struggling Huntingdon-based hospital in February in what is seen as a potential model for other hospitals across the country.
David Moon, director of health value for money studies at the NAO said: "There are potential other franchises, currently George Eliot in Nuneaton is under review by the department as to how their management arrangements are going and this is one potential option. But we believe that before any other franchises are entered into, the department should do a lessons learned exercise to make sure that any weaknesses in the process are ironed out for any future tenders."
In a report about the franchising of Hinchingbrooke, the NAO said that during the procurement process, the East of England Strategic Health Authority assessed the reasonableness of the bidders' savings proposals but it did not fully consider the relative risks of the saving proposals.
Circle plans to achieve £311 million in savings over the 10-year contract. If Circle does not deliver a surplus, they get no franchise fee. But the first £2 million of any in-year surplus is retained by the private provider and any surplus above £2 million is split - some to pay off the trust's historic deficit of £38 million and the rest to Circle.
Margaret Hodge, chair of the Committee of Public Accounts, said: "The purpose of franchising Hinchingbrooke hospital to a private company was to turn around the financial fortunes of a failing NHS trust, yet after just eight months under Circle's stewardship, the trust has drifted a further £4.1 million into the red. Above all, I am astonished that the contract allows Circle to pocket any profit ahead of addressing the trust's deficit. Worse still, Circle suffers no penalty if at the end of the 10 years the deficit is not paid off in full."
Health Secretary Jeremy Hunt said ministers would look closely at the NAO's recommendations.
"The important thing is that we did protect the taxpayer," he told the BBC Radio 4 Today programme. "In terms of the losses they have identified, not a penny of those are actually being borne by the taxpayer. They are being borne by Circle."