The medicines watchdog, NICE, is to lose its power to turn down new medicines for use on the NHS.
It will give advice on which drugs are effective, but will not decide whether patients should be given treatments their doctor recommends, the Department of Health has confirmed.
Instead, groups of GPs will decide whether a drug should be funded or not.
Ministers hope to make new drugs affordable to the NHS by negotiating with pharmaceutical companies on price.
The plans, called value-based pricing, are set to come into effect in 2014. They are subject to consultation.
A Department of Health spokesperson said: "We will introduce a new system of value-based pricing which will make effective treatments affordable to the NHS.
"Our plans will ensure licensed and effective drugs are available to NHS clinicians and patients.
"We will focus NICE's role on what matters most - advising clinicians on effective treatments and quality standards - rather than making decisions on whether patients should access drugs that their doctors want to prescribe."
The National Institute for Health and Clinical Excellence's (NICE's ) guidance on recommended drugs applies to England and Wales, and also usually Northern Ireland.
Andrew Dillon, chief executive of NICE, said: "We support moves to extend access to new treatments at prices which reflect the additional value to patients.
"NICE is the global leader in evaluating the benefits of new drugs and we anticipate being at the heart of the new arrangements."
The cancer charity, Macmillan Cancer Support, said NICE had performed an important role for the NHS but had "misread" the public mood.
Mike Hobday, Head of Policy, said: "Having a body that can say 'no' to pharmaceutical companies has been crucial in driving the price of drugs down, so that the NHS can afford to support patients more often.
"But NICE has too often misread the public mood in rejecting clinically effective drugs for rare cancers.
"It has placed insufficient weight on the importance of allowing the NHS to give patients with rare cancers the drugs that their doctors believe will extend or improve the quality of their lives."
He said the charity was talking to the government to ensure that the NHS would be able to provide all cancer patients with clinically effective drugs recommended by their doctors.
Health think tank, The King's Fund, said NICE had made "significant progress" in providing an evidence-based approach to decisions on the cost effectiveness of drugs.
This had helped the NHS get more value from the way it spends its money, although it had not eliminated local variation, said chief economist Professor John Appleby.
He added: "With the NHS budget under huge pressure, it will be essential that the new arrangements work to generate more benefit from what already amounts to well over £10 billion spending on drugs each year."