Gordon Brown made a brave attempt yesterday to explain government policy on healthcare reform. So far, Labour has concentrated on “capacity”, he said in a forward to Lord Darzi of Denham's 60th anniversary review of the NHS. From now on the focus will be quality.

Nurses will be rated according to their attitude and performance. Hospitals will be ranked by objective data, including death rates from specific illnesses, and by asking patients how they feel they have been treated. Extra money will flow to the best performers. The result will be “a more personalised NHS ... giving us real control and real choices over our care and our lives”.

The Prime Minister was as optimistic about the future as he was glib about the past. Hegel himself would have been proud of his deft rationalisation of ten years of NHS investment that has indeed boosted capacity - at a cost now of about £100 billion a year - but has also wasted tens of billions on ill-judged pay settlements and failed to boost outcomes for patients with severe and chronic illness into the top tier where British healthcare should belong.

Lord Darzi's emphasis on quality is therefore welcome. It is depressing for its tacit acknowledgement that quality of care could have been neglected in a field where it should be non-negotiable, but this is not Lord Darzi's fault. His report as a whole is well intentioned if overdue. It speaks for patients, doctors and nurses, not those paid to set and enforce targets. It has the courage to admit that patients will benefit if the private sector has more freedom to bid for primary care contracts, and it has the compassion to insist that the process for approving lifeenhancing drugs be speeded up.

But even within the existing structure of the NHS - which it does not challenge - this report has a fundamental flaw. It demands substantially improved care across the board, without giving any indication how this might be funded.

The context is important: after five years of substantial real-terms increases, NHS budgets have been effectively frozen until 2011. Healthcare inflation, meanwhile, is likely to shadow the rate in the United States, where it is already double the underlying rate and projected to accelerate for at least a decade. Here as in the US, healthcare costs are driven by demographics and medical science. Baby-boomers outnumber under-16s in the UK and are now entering old age, when their demand for life-extending but increasingly expensive drugs will peak.

Yesterday the NHS stepped on to this inflationary train by guaranteeing patients access to all approved drugs “where the clinician recommends them”. The “constitution” attached to the Darzi report that sets out this new entitlement fails conspicuously to acknowledge that its cost could quickly spiral out of control. The only cost-control tool to feature in the report is an end to GPs' minimum income guarantee - and it will not be enough.

Hospitals will now have to measure and publish patient outcomes. About time too; without this information, patient choice is meaningless. But to deliver world-class care the NHS must do much more. It must be able to harness and pay for the costly miracles of medical science, respond to the changing needs of changing demographics and foster centres of research-led medical excellence. One part of the funding solution must be to allow co-payments for “top-up” treatments. But the NHS will not be truly free to modernise itself and satisfy its patients until it allows the thoroughgoing deregulation of healthcare supply. The goal must be an NHS that delivers the best possible care, not a monument to outdated ideologies. Lord Darzi's proposals are a step in that direction, but a timid one.