The public accounts committee said there had been much criticism of Atos, the firm contracted to conduct so-called work capability assessments (WCA), but it warned that most of the problems lay with the Department for Work and Pensions.
The tests on claimants were introduced in 2008 to assess entitlement to employment and support allowance. Atos was paid £112.4m to carry out 738,000 assessments in 2011-12.
The MPs' report said: "The Work Capability Assessment process is designed to support a fair and objective decision by the department about whether a claimant is fit for work, but in far too many cases the department is getting these decisions wrong at considerable cost to both the taxpayer and the claimant.
"The department's decisions were overturned in 38% of appeals, casting doubt on the accuracy of its decision-making.
"Poor decision-making causes claimants considerable distress, and the position appears to be getting worse, with Citizens Advice reporting an 83% increase in the number of people asking for support on appeals in the last year alone.
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