Alan Milburn has said he expects all hospitals in England to become foundation trusts within the next few years.
Three star hospitals can apply
The health secretary put in a robust performance in front of the Commons health committee where MPs subjected him to some tough questioning.
More than 100 Labour MPs have signed a motion voicing opposition to the policy which they fear will create a two-tier NHS.
Supporters believe that allowing some hospitals to raise private finance on the open markets will create centres of excellence and drag other hospitals up with them.
Conservative health spokesman Liam Fox said his party was "very much supportive" of the plans provided they did not get too watered down in the face of internal Labour opposition.
For the Lib Dems, Evan Harris said the fact that successful hospitals would be given more meant it was hard to deny the government was widening the gap between different health facilities.
But Mr Blair's spokesman insisted that foundation hospitals would not create a two-tier NHS, saying the government wanted all hospitals to be run in that way.
"We are starting with the best managed because by definition they are best placed to run their own affairs," he said.
"But we are not saying that poor hospitals will be left to sink or swim."
Fresh on the heels of the huge Commons rebellion by Labour MPs over Iraq, any revolt on the domestic front would be a blow to the prime minister.
Mr Milburn insisted that the government would plough on with its plans for NHS hospitals saying that already 32 NHS trusts had expressed interest in the foundation idea.
Most Labour MPs would feel extremely uncomfortable about giving one sort of hospital preference over another
He rejected that he was introducing elitism into the system and pointed out that the health service could not claim at present to deliver a "uniformity of provision".
Labour chairman of the health committee, David Hinchliffe, told Mr Milburn that he resented plans to introduce foundation hospitals in his constituency despite the fact that he, as a democratically elected representative, had not been consulted.
"The entire process of starting this has treated the local communities with
complete contempt," he said.
Mr Milburn insisted: "We are not at that stage".
Later the health secretary told BBC Radio 4's World at One programme that there would be extensive local consulation over the introduction of foundation hospitals.
Health committee member and Labour MP Julia Drown is one of those who says she is ready to vote against the Bill.
"Most Labour MPs would feel extremely uncomfortable about giving one sort of hospital preference over another," she told Today.
And the husband of Solicitor General Harriet Harman, T&G union leadership hopeful Jack Dromey, warned that it would be a case of "foundation hospitals today, charging tomorrow".
But Labour peer Lord Desai told Today that the idea would set hospitals free to respond to local need.
Mr Blair told the Labour Party conference last autumn that he wanted an end to the "one size fits all" mass production public service.
The prime minister believes the answer to the problem of delivering better health services is foundation hospitals.
Together with Mr Milburn, he is convinced it is the best way forward and so far more than 30 hospitals have applied to be given the freedom to raise money to boost their budgets, set pay levels and appoint the staff they want.
The problem is that a growing number of his own backbenchers are totally opposed to this policy.
Of the 116 MPs to sign the Commons motion against foundation hospitals there are many Labour "loyalists".
There is also much union opposition to the plans.
They fear it will be only the first step towards greater commercialisation of the NHS.
Last October Mr Blair was forced to intervene in a spat over foundation hospitals between Chancellor Gordon Brown and Mr Milburn.
The two men had disagreed over just how free foundation hospitals were going to be but in the end a compromise deal was hammered out.