After a considerable parliamentary battle, government plans to create foundation hospitals have been passed.

The move followed threats by Commons leader Peter Hain that both Houses of Parliament would be called to sit for extra hours to prevent the bill from running out of time.

MPs first passed the bill on a majority of just 17, before peers again rejected a key clause of the legislation by 68 votes. "No matter how many times this bill goes back to the Commons, it will come back with this clause and schedule reinstated," said health minister Lord Warner.

On a second vote, the government saw their majority increase to 41, before Conservatives in the House of Lords conceded defeat. Opposition parties claimed that the vote was carried only with the assistance of MPs from Scotland, where the legislation will not be implemented.

The Health and Social Care (Community Health and Standards) Bill offers the best-performing hospitals in England and Wales greater financial autonomy. "An issue of this kind is essentially one of policy rather than constitutional principle," said shadow health minister Lord Howe. "It is not for us to continue to resist the will of the elected House."

Liberal Democrat health spokesman Lord Clement-Jones described the move as "fundamentally flawed".