National pay agreements for NHS staff should be dropped and each healthcare organisation be allowed to negotiate its own deal with employees, a report has recommended.
Reform, a centre-right think-tank, said the change would allow hospitals to reward good performance, introduce innovative working practices and improve care for patients by dealing with staff who are under-performing.
It would also allow trusts to take advantage of the expected surplus of doctors in the UK to "drive down pay" and review the hierarchy of medical ranks in hospitals, it said.
The report entitled Doctors and Nurses warned pay freezes prevent employers from using their discretion to change working practices or incentivise good performance.
Nick Seddon, deputy director of Reform, said that the current pay arrangements were undermining Health Secretary Jeremy Hunt's goal of improving quality and efficiency in the NHS.
"There is a glaring contradiction between his goal of a higher quality NHS and his Department's support for national pay arrangements."
Reform said ministers should offer their "full support" for NHS organisations challenging national pay bargaining, such as the group of 20 trusts in the South West which have formed their own consortium to consider breaking away from the national framework.
Public sector union Unison said that breaking up national pay, terms and conditions would "do nothing to improve patient care but would cause massive industrial unrest across the NHS". Unison head of health Christina McAnea said: "Reform's report is writing the wrong prescription for NHS pay.
"It ignores the fact that Agenda for Change has a proven track record of delivering fairness and for keeping the industrial peace across the NHS.
"However, the South West cartel's proposals go much further and are standing in the way of reaching a national agreement that would benefit patients and staff alike."
Jim Clawson, chair of Unison Devon area health forum, criticised the report as "very short on evidence".
A spokesman for the Department of Health said: "Reaching a swift and successful conclusion in these national negotiations will significantly reduce the need for separate, local deals."