The NHS in Wales needs to cut up to £1bn from its annual budget by 2015, according to the Wales Audit Office (WAO).

According to the Welsh Assembly, the savings needed – some 5% of the health budget – are “unprecedented”.

Welsh health boards are planning to centralise services in new treatment centres to save long-term coasts – but the WAO has warned this will be difficult to fund.

The WAO report says the NHS faces the most difficult financial settlement of any UK country: it needs to save between £870m and £1bn per year up to 2015.

According to Auditor General Huw Vaughan Thomas, “Even after the very significant savings already made, the status quo is simply unaffordable and there have to be service changes to secure its long-term future.”

He identified a “catch-22”: the system cannot afford either to change or to stay the same. “There is a major challenge for the NHS and Welsh government to identify the costs of reform and the options to fund it.”

Capital funding has been cut by 36%, though the Welsh Government plans to provide £228m extra start-of-year funding over two years in order to help prevent health boards needing a bailout at the year-end (as happened to four this year).

Health Minister Lesley Griffiths said: “I am very pleased the Auditor General recognises our approach to NHS finance, introducing a more flexible system which removes the dependency on end-year bailouts, is sensible and sustainable.”

Swansea University health economist Professor Ceri Phillips suggested that a solution could be to sell off older facilities in order to fund new treatment centres.

“Then we would see savings through the fact that patients would be released and discharged earlier from hospital without compromising safety,” he said.

Hospital trusts in London and Yorkshire have reached the point of no return, without hope of reaching Foundation Trust status in their current form.

South London Healthcare NHS Trust has gone into administration after running up deficits of more than £150m.

Mid Yorkshire Hospitals NHS Trust has seen its deficit increase in a year from £19.2m to £44.2m, and is considering options for service closure.

Over 20 hospital trusts are struggling to meet Foundation Trust criteria by the 2014 deadline and find a place in the new provider landscape.

The first NHS trust to go into administration, South London Healthcare was formed in 2009 from the merger of three NHS hospitals with a joint deficit of £21m.

The trust serves more than a million people in the capital. Despite saving £41m in 2010–11, it ended the year with a £41m deficit which has since escalated.

Mid Yorkshire Hospitals Trust, which also comprises three hospitals, is considering two options to halve its current £44.m deficit by April 2013.

The trust said it would “not be in a position to progress to Foundation Trust status in the foreseeable future”.

Stephen Eames, the trust’s Interim Chief Executive, said: “The challenges faced by the trust have been a matter of public concern for many years.”

Two options were on the table, he said, both with the aim of immediately reducing the deficit: “The first looks at doing what we must do to make services clinically safe and sustainable, whilst the second goes further, radically reorganising services across our hospital sites to make the best use of resources.”

The first option would include consolidating children’s and maternity services in Wakefield, while the second would bring all emergency and complex services into the Pinderfields hospital.