Hospitals could lose out on a further £620,000 for not starting enough cancer treatments on patients quickly enough.
A payment of almost £620,000 has already been held back for missing the target in June, while a further £620,000 could be withheld for missing it again in December.
Doctors who run Leicester City clinical commissioning group (CCG), who take on responsibility for buying city health services from April 1 and who are responsible for monitoring the contract with Leicester's hospitals, have described the situation as "unacceptable".
Simon Freeman, managing director of the CCG, said: "It is down to administration of this group of patients. There is enough capacity."
Department of Health rules state that 85 per cent of cancer patients should begin their treatment within 62 days of referral by their GP.
A report to the board showed in December, 84.3 per cent of patients started cancer treatment at Leicester's hospitals.
In June, the figure was 77 per cent.
Dr Azhar Farooqi, chairman of the CCG, described the situation as "unacceptable".
He said: "The contract penalty is the only way to get Leicester's hospitals to change.
"We have to make sure they are getting to grips with this."
Managers at the CCG are working with Leicester's hospitals to agree an action plan to address the issue and if performance improves the cash will be released.
Andrew Furlong, divisional director for planned care at Leicester's hospitals said an average of 130 patients a month were treated within the 62-day target – the equivalent of about 84 per cent.
This means if one or two more patients were treated the 85 per cent target would be met.
Mr Furlong said: "Treating patients with cancer or suspected cancer quickly is something we take very seriously, because we know how important it is for patients to receive early diagnosis and treatment.
"Some of these patients need to have complex investigations which can mean that their treatment goes beyond 62 days and some choose to wait for their treatment.
"But it can also be down to how well we manage our processes.
"We are doing everything possible to improve them.
"We continue to do all we can to avoid cancelling planned tests and procedures and we know we need to make sure we are more accessible, so have introduced an evening telephone service to contact patients.
"This will help patients attend their initial appointment within two weeks and is already making a difference.
"We know that any delay is distressing for our patients and we are doing everything to ensure that we meet the expected standards in cancer care."
