A highly critical report from MPs has condemned the "shockingly complacent" response to 1.7 million fines being wrongly issued to patients in England after visiting the doctor or dentist.
Meg Hillier, chair of the Public Accounts Committee, said the penalty fine system was "not fit for purpose".
The fines were aimed at patients unfairly claiming free treatment - but a third were sent to innocent people.
The Department of Health has promised extra checks before fines are issued.
The cross-party committee of MPs, which scrutinises public spending, said the system of healthcare fines needed a fundamental overhaul - accusing it of being over-complicated, inefficient and causing distress to vulnerable people.
'Presumption of guilt'
Ms Hillier called on the Department of Health to change an "utterly confusing" fining regime, which at the moment operates on a "presumption of guilt".
She said the NHS fining system had become a "dog's breakfast".
The report said that since 2014, fines with a value of £676m had been issued - often fines of £100 - to people accused of dishonestly claiming free dental treatment or unfairly avoiding paying prescription charges.
But the MPs described a chaotic system in which about a third of these fines were sent to people who were entitled to free treatment, including people with serious health problems, dementia and learning difficulties.
They said the system was so complicated that a one-page form which patients were required to complete needed a 24-page handbook to explain what it meant.
The committee raised concerns that people who were unfairly fined might have paid out of embarrassment - and that others might avoid getting treatment because of their fear of being fined.
'Vortex of bureaucracy'
The British Dental Association had told MPs that visits to the dentist by low-income patients had fallen by almost a quarter since 2014, which they linked to anxiety about fines.
Ms Hillier said that people wrongly accused of fraud faced "humiliation" and when they tried to overturn a fine they could find themselves caught up in a "vortex of bureaucracy".
There was criticism of how "vulnerable" people might be pursued for fines, while other persistent fraudsters, with "clear evidence" against them, did not seem to face any effective action.
Only about a fifth of the fines levied were paid and the report said the recovery rate, set against the scale of the bureaucracy, was "pitiful".
Giving evidence to the committee, the Department of Health had suggested there could be a technical solution to reducing the number of incorrect fines and raised the possibility of a "real-time" computer check on whether patients were eligible for free treatment.
But MPs said they were "highly sceptical" about how soon such a computer system could be delivered.
The Department for Health has promised to introduce an extra layer of checks - contacting people before they are fined to give them a chance to show they are exempt from paying for treatment. This is intended to filter out some of the wrongful fines.
The committee's report called on the Department of Health to report back in six months with how much progress has been made with this.
But Ms Hillier warned it must not just be a "sticking plaster" that could add another layer of bureaucracy.
Charlotte Waite, of the British Dental Association, backed the committee's call for the fining system to be overhauled.
"A system that's hurt our most vulnerable patients and treated millions who've made honest mistakes like fraudsters requires more than tweaks," she said.
Caroline Abrahams, of Age UK, said there was a lot of confusion about eligibility for free treatment for the elderly, and the risk of being fined was "incredibly stressful".
Lloyd Tingley, of the charity Parkinson's UK, said the NHS fining system "unfairly discriminates against some of the most vulnerable people".
For people with learning disabilities and their families, the threat of fines is a "huge source of unnecessary stress", added Dan Scorer, of the charity Mencap.
A spokesman for the Department of Health said it would consider the report and respond in due course.
"Prescription and dental fraud cost the NHS an estimated £212m in 2017-18 and it is absolutely right the government takes steps to recoup this money so it can be reinvested into caring for patients," he said.