Peers have inflicted a major defeat on the government by throwing out plans to create foundation hospitals.
The bill is one the most controversial pieces of legislation
The vote sets up a new battle between the Commons and the House of Lords.
Health Secretary John Reid accused peers of wrecking crucial legislation and he vowed to fight to reverse their action when the bill returned to the Commons.
Plans to give limited operational and financial freedom to some hospital trusts in England form the main part of the government's flagship Health and Social Care Bill.
Conservative and Liberal Democrat peers joined forces to defeat
the measure, which was also opposed by some Labour and independent peers.
The government lost the vote on foundation hospitals by 150
votes to 100.
The bill is due to return to the Commons before the end of
this parliamentary session in a fortnight.
Critics of the foundation hospitals plans say they will damage the NHS and could result in a two-tier health service.
The bill has already caused major problems for ministers and resulted in one of the largest Commons rebellions last summer when the government's 164 working majority was cut to just 35.
Mr Reid said: "I am very disappointed that members of the House of Lords have proactively sought to wreck this crucial piece of legislation.
Earl Howe: Foundation hospitals could 'disadvantage' NHS
"As they well know their role is to scrutinise and improve legislation and by doing this they have
gone well beyond their role."
He added: "The government will do all it can to reverse this action when the bill returns to the Commons as it remains firmly committed to decentralising and giving more power to the NHS frontline."
Tory peers say the government has failed to answer their concerns that the bill will not deliver genuine freedom to hospitals, that non-foundation hospitals will suffer and the whole exercise will be costly and ineffective.
Conservative health spokesman Earl Howe said he felt "genuinely disappointed" that he felt compelled to oppose "devolution" in the NHS but said the government's proposals were flawed.
"I am desperately worried by these
proposals because of what they will do to force and tie the hands of management in ways that could be profoundly counter productive for people's health care," he said.