The government's plans for a health service shakeup face a radical overhaul after the Liberal Democrat leadership was forced to bow to the strength of a grassroots rebellion fuelled by fear of privatisation and an undue emphasis on competition.

The Lib Dems voted almost unanimously at the party's spring conference in Sheffield to give councillors a central role in GP commissioning and in scrutinising foundation trusts. They called for a ban on all cherry-picking by private companies offering treatment services.

David Cameron will hold talks this week with his deputy, Nick Clegg, to decide whether the rebellion provides an opportunity to make changes to a health and social care bill that has become increasingly unpopular. Cameron acknowledges the government has not got his message across on health.

The bill hands £80bn to new GP commissioning boards and will allow any willing provider to compete to provide services.

The health secretary, Andrew Lansley told BBC1's Politics Show: "We've already made changes. We are not sitting there thinking we must know the answers and nothing can change. If we can clarify and amend in order to reassure people, then we will do so."

He claimed the bill already prevented cherry-picking by the private sector and extended accountability.

Coalition ministers are expected to avoid a rebellion at the bill's report stage in the Commons or in the Lords, where the medical profession is a strong lobby and could rip the bill apart. The vote in Sheffield will free previously loyal Lib Dem MPs to voice opposition inside the parliamentary party.

Key party members stressed they had no master plan in response to the vote, but said it could not be ignored and argued many Conservatives were uneasy about the reforms.

Faced with certain defeat in Saturday's vote, the leadership accepted two amendments, supported by Baroness Shirley Williams and the former MP Evan Harris, and promised to take the critical messages back to government. Clegg agreed to the amendments after a breakfast meeting with Williams.

Some Lib Dem cabinet members want to use the revolt to rework the bill, which they admit is unpopular, little understood and seen as the sort of top-down reorganisation the coalition had vowed not to enforce. One said: "I thought we had committed ourselves to give the NHS more money and to leave it alone. I like Lansley, but I do not know why we are doing this."

Clegg told his party: "All of us in government are listening and we take these concerns seriously." He said he wanted reform and he was totally opposed to the privatisation of health. He said the amendments went with the grain of the bill.

Harris responded to Clegg, saying: "The conference voted overwhelmingly for more accountability and openness in commissioning, for a rejection of the marketisation of the health service and for safeguards against cherry-picking by private sector providers… and against the undermining of local NHS services. Nick's rejection of privatisation, while welcome, does not yet address all these issues."

The amended motion said:

• No decision about spending of NHS funds should be made in private, which could have happened under the proposed GP consortiums.

• NHS commissioning must be retained as a public function, rather than sub-contracted to private companies.

• No new private providers should be allowed where there is risk of cherry-picking.

• GP commissioning boards must construct annual plans in conjunction with new health and wellbeing boards.

• There must be a continued separation of commissioning and provision of services to prevent conflicts of interest.

• Half of the members of the new commissioning consortiums must be local councillors appointed as non-executive directors.

Downing Street said: "This is not about significant changes to the policy but about reassuring people with minor changes to the language of the bill as it goes through the House."