Parliament's spending watchdog has welcomed a marked improvement in the process of medically assessing people on incapacity and disability benefit.

The National Audit Office found that the Department for Work and Pensions and its contractor Schlumberger have improved arrangements for the medical assessment of benefit claims since a damning report in 2001.

"They have improved the speed of processing, the standard of medical reports and the quality of service provided by Schlumberger," said the NAO.

"However, both parties could learn more from the results of appeals, work to obtain better evidence, and deal with overbooking appointments and customers failing to attend."

Disability and incapacity benefits cost over £18 billion a year, the watchdog said.

Reports by the NAO and the Commons public accounts committee highlighted areas for improvement in the speed of benefit processing, the quality of medical evidence, and the quality of service to the public.

In 2001 significant changes were made to the original contract and new targets were introduced.

Since then, targets for most aspects of service quality - waiting times, meeting special requests such as for same-gender doctors - have been met, the report finds.

In 2001, there was a backlog of nearly 300,000 incapacity benefit cases where the recipient was due for a medical examination.

This has now been reduced to under 40,000 cases, and the department expects to eliminate the backlog in the next six months

NAO chief Sir John Bourn said: "I am pleased that the measures taken since my last report have resulted in significant improvements, especially as this means a better service for customers, who include some of the most vulnerable members of society.

"It is crucial that assessments are undertaken fairly and efficiently, while ensuring that benefits are paid only to those genuinely entitled to them.

"I look to the department to do more to improve the quality of evidence on which decisions are based and to tackle the problem of people failing to attend examinations."