The contract underpins the Department for Work and Pensions’ efforts to move people from sick benefits into work.

The National Audit Office said the DWP had failed to penalise Atos for “under-performance”, and had not set “sufficiently challenging” targets.

The DWP said it was committed to making the Atos agreement a success.

French firm Atos was paid more than £112m in the last financial year to carry out about 738,000 face-to-face medical tests on benefit claimants.

Wrong decisions

The DWP used the test results, known as work capability assessments, to decide whether people were fit to work or eligible for Employment and Support Allowance (ESA).

The assessments were first introduced on a pilot basis by Labour in 2008 and rolled out across the country by the coalition government.

Officials at the DWP have got many decisions wrong, with nearly four out of 10 appeals upheld at tribunals.

The NAO said it was unclear whether the quality of the tests was to blame for the number of wrong decisions.

In a letter to Tom Greatrex, MP for Rutherglen and Hamilton West, seen by the BBC, the NAO’s Comptroller, Amyas Morse, said it was hard to know whether changes to the tests were needed.

“It is difficult to assess, as the department does not routinely request feedback on the rationale for tribunal decisions.

“Without such data it is not clear whether any changes in the medical process are needed,” Mr Morse added.

The DWP had previously admitted that Atos had not carried out some fitness testing within the agreed time limits, and performance had been “below the standard” since mid-2011.

The NAO criticised the DWP for not seeking “financial redress” for these delays.

It said just 10% of the penalties triggered by poor performance had been applied.

The spending watchdog added that the DWP’s negotiating position has been undermined by “inaccurate forecasting” of the number of people likely to need a medical test.

A DWP spokesperson said the contract had “changed considerably” since it was signed by the Labour government and as it evolved remained under constant review.

“In 2010, the Work Capability Assessment was not working properly and since then we’ve substantially improved it.

“It is a complicated area but we are committed to making it a success to ensure it is both fair and accurate for the user and value for money for the taxpayer.”

Mr Greatrex asked the NAO to carry out the review of the contract, saying the coalition government had failed to get value for money for the taxpayer and “properly hold Atos to account”.

“The taxpayer is effectively paying for this service twice – once through the £112m a year Atos receives from the DWP, and then again through the £60m a year spent on appeals and clearing up the mess that results from Atos assessments.

“Yet as the NAO makes clear, the Government has failed to claw this money back from Atos to reimburse the taxpayer.

“The principle of assessing a claimant’s fitness to work is a sound one. But people who are genuinely sick and disabled need to be helped, not hounded,” the MP added.

‘Challenging contract’

Mr Greatrex has called on ministers to reflect on the report and consider reforming the system.

A spokesperson for Atos said it worked very closely with the DWP on a “complex and challenging contract” to “fulfil all our contractual obligations”.

“We have also been flexible within the contract, for example implementing changes and recommendations from the Harrington report.

“Where changes to the contract have resulted in slower processing times we have worked alongside the department to address this.”

Complaints that the medical test causes distress have been made since they were first introduced.

In May 2011, six charities – including the MS Society and Parkinson’s UK – urged the government to make the tests fairer for patients whose symptoms vary in severity over time.

A month later, campaigners claimed in a letter to the Guardian newspaper, that assessments were causing “huge” distress, and had even resulted in suicides.