The Public Accounts Committee (PAC) examined the impact of new terms and conditions introduced in 2003, which were intended to improve the management of the 40,000 consultants contracted within the NHS.
It found the contract allows consultants to refuse to work during evenings and weekends.
As a result, hospitals have been struggling to provide the appropriate level of consultant-led care for patients.
In its highly-critical report, the Committee found the cash-strapped health service has to pay up to £200 an hour in overtime to consultants because their contract does not cover evening and weekends.
MPs also attacked annual appraisals, calling the use and quality of them as "patchy"; 17% of consultants had not had an appraisal in the past year. They said it was "startling" to hear that nearly half of trusts do not assess whether consultants have met the objectives of their job plans.
The Committee said pay progression for consultants is linked to years in the job rather than how well they are performing. And Clinical Excellence Awards, which cost £500 million a year and, reward high performing consultants are held by 60% of consultants.
"This nonsense highlights how badly consultants' performance is being managed," said Committee chair Margaret Hodge. "A proper culture of performance management for consultants and other NHS staff must be implemented if we are to avoid incidents of poor performance.
"Despite the increased pay, there is still a shortage of consultants in some parts of the country, in hospitals in deprived areas and in specialties such as geriatric medicine.
"This makes some trusts reliant on locum consultants, who provide less continuity of care for patients as well as being more expensive for the NHS."
Barbed rhetoric
The report points out that the contract is at odds with current NHS plans to encourage more senior doctors to work evenings and weekends.
Dr Paul Flynn, of the British Medical Association's consultants committee, said the report was unhelpful and overly critical of hard-working doctors.
"The barbed rhetoric from the Public Accounts Committee describing the system for awarding excellence as nonsense is particularly unhelpful at a time when we are trying to come up with some broad principles for potential negotiations.
"Doctors are crucial to innovation in the NHS, and their work not only improves quality, but also frequently saves taxpayers money." Flynn added.
