Under a new funding system called 'payment by results', a national tariff for all palliative care is due to be introduced from 2008, regardless of which organisation delivers it.
But officials in the Department of Health suggested the idea of a "differential tariff" for hospices and other charity service providers at a meeting of the National Partnership Group for Palliative Care. The proposal would mean the rate for the sector would be one-third of the full tariff because there is no new money to reverse a deficit of £200m in voluntary sector contracts.
Providers within the NHS and any private sector suppliers of care would be paid the full tariff by primary care trust commissioners under the plan.
Peter Tebbit, policy consultant at the National Council for Palliative Care, said voluntary sector providers would find the proposed two-tier system "utterly unfair, inequitable and contrary to the indications the Government has consistently given.
"The Government either stands by its policy of full cost recovery or it doesn't. If not, then it must argue its case."
Chris Shaw, deputy chief executive of Help the Hospices, said she was "alarmed by any suggestion at all that there would be a differential tariff for the voluntary sector".
The tariff system, intended to bring about a 'mixed economy' of providers in the NHS, has already been introduced in areas, including acute care, in which more private sector providers, such as Bupa, operate.
They have not only been paid the full tariff, but have also been given transitional relief to cope with increased costs.
"The Government sees the voluntary sector as a soft touch," said Stephen Collinson, director of healthcare at Sue Ryder Care.
"It thinks we can raise money through charitable donations, so it believes it shouldn't have to pay the full cost of care. No independent sector provider would tolerate that."
A spokeswoman for the Department of Health said payment by results currently applied only to services provided by NHS trusts and foundation trusts.
"Further work will need to be done before ministers can make a decision on extending payment by results to the voluntary sector," she said.