The head of Birmingham Children's Hospital has warned the Government that the hospital could lose more than #2 million over the next year and have to cut vital treatments because of a new NHS payments system.

Paul O'Connor, the hospital's chief executive, joined the heads of three other children's hospitals in sending a letter to Ministers warning of impending financial difficulties and calling for the payments by results system to be rethought.

The hospitals said they were "extremely concerned" that cash problems would force them to make cuts to vital treatments for children, particularly in surgical specialities. They labelled the new proposals, which will see hospitals receive payments according to a tariff setting an NHS-wide price for each individual treatment, as "inaccurate and highly insensitive".

The move, which is a flagship of Tony Blair's structural reforms of the health service, is expected to cost Birmingham Children's Hospital at least #2.6 million in 2006-07 and could cause problems in future years.

The four hospitals - the other three are Alder Hey in Liverpool, London's Great Ormond Street and Sheffield Children's Hospital - together expect to lose around #22 million during the next year, the letter said.

The Government has argued that the move will give patients greater choice by allowing GPs to know how much a given operation will cost. It will also reward hospitals which perform well.

But the trust chairs, who wrote to Health Ministers Jane Kennedy and Lord Warner and acting NHS chief executive Sir Ian Carruthers on behalf of the National Children's Health Alliance, argued that the system would disadvantage paediatric specialist trusts.

A Department of Health spokesman said: "We do not recognise the figure of a #22 million shortfall. We do, however, recognise that there are some issues to be resolved with the tariff in relation to the specialist children's hospitals."