There are not many 80-year-old politicians who can make their parties stop, think and change direction. But Shirley Williams is one of them. The former education secretary and co-founder of the SDP walks with a bit of a stoop these days. But intellectually she remains a towering figure at the height of her powers. In terms of influence within the Liberal Democrat party, few can match her. Among older friends and colleagues, she is known simply as "Shirl the Pearl" – a term that carries with it affection and also huge respect.

When we meet in a Sheffield hotel, during the Lib Dem spring conference, she is carrying a large bundle of papers, including letters from doctors and nurses who share her concerns about the coalition's plans to reform the NHS.

She picks out one. "It is from a doctor. He says: 'I didn't think I was voting Liberal Democrat to see the Liberal Democrats supporting Conservative policies. At least you must maintain your identity.' I think that is a perfectly fair point."

Williams speaks out relatively rarely these days, not because she is in any way out of touch, but because she knows that by choosing her moments she will have more effect. On this occasion she feels intervention is essential – not just for the NHS but also for the future of Nick Clegg's Liberal Democrats. She thinks too many senior Libs are failing to fight Tory policies and stick up for Lib Dem principles.

During last month's week-long parliament holiday Williams retreated to her home in the New Forest with several massive tomes about health secretary's Andrew Lansley's NHS bill.

"I had an instinct if you like. I just felt very deeply that this was something that was completely misconceived. I read the impact statement, the official impact statement, the equality statement, these are all huge things... I have never ploughed through so much. I took just one afternoon off from it, walking in the rain through the forest I love."

As she read on, she found what she had feared, hidden away "sprinkled through these documents". "I don't know if they were deliberately hidden or just lost in the civil service flam – but because of this vast flow of material you would suddenly find a reference, for example, to 'we are going to lift the cap on the number of private beds in NHS hospitals' very deep in the impact memorandum."

It was, she realised, a plan to dismantle what she calls "one of the most efficient public services of any in Europe". She sums up Lansley's agenda as "stealth privatisation". There were other aspects that would transform the NHS beyond recognition, tucked away, such as allowing "any willing provider" to supply services. "The NHS was always seen as the preferred provider. That is swept away," she says. Then there was the obligation to encourage competition at all levels.

Williams is careful not to accuse ministers of deliberately hiding their intentions from the public – but she comes close. "I would certainly say there was no strong desire to make it as clear as possible to people what was being proposed."

Yesterday, with Williams urging them on from the conference platform, a Lib Dem motion supporting Lansley's plans was torpedoed by a rebel amendment objecting to the "damaging and unjustified market-based approach". "Conference regrets that some of the proposed reforms have never been Liberal Democrat policy, did not feature in our manifesto or in the agreed coalition programme, which instead called for an end to large-scale top-down reorganisations," the text stated. Williams's influence was all over the amendment.

For her nothing is more important than the NHS. But she believes the necessary row in Sheffield is part of a wider political battle over how Lib Dem leaders, Clegg included, must operate in the coalition from now on.

Lib Dems must be prepared to rise up more often against the Tories. "I think some of my colleagues believe that being in a coalition means that once the leadership, or any part of the leadership, has announced a policy, which may be a policy that comes almost entirely from the Conservative side, it is then your obligation as a loyal Liberal Democrat to make that happen. This is not my view at all. It is misplaced loyalty."

Her party should back those policies that it signed off in the coalition agreement – but feel free to oppose those, like Lansley's blueprint, that were not. If they cannot fight the Tories when they feel it is right to, they will shrink as a political force, she says. "You will get a lot of people leaving or not voting. They will see no point."

Williams insists she is not trying to make trouble for Clegg, for whom she has a high regard. She also says she thinks aspects of the health reforms are good, such as the emphasis on treating people at home wherever possible.

But she dislikes the way people are discouraged from expressing their views. "I have a lot of respect for Nick but I think his position would be strengthened if he and the whips pulled back from this discplinarian position they think they should take.It is especially important with the Lib Dems who are used to extraordinarly freewheeling political discussion. The idea that you sort of stand in line, touch your cap and walk through the lobbies is just not an idea that we have."

She is critical of Clegg for his claim that the Lib Dems must "own the coalition" rather than fight individual battles and hold up "trophies" to show their influence within it. "He was wrong. I think he could reasonably say that we own the coalition agreement but not the coalition come hell or high water, because there are very deep differences."

After yesterday's vote, Clegg must act. "It means that Nick Clegg has to go back to Lansley with the other Lib Dem members of the cabinet and say: 'I can't get this through my party. We will have to make amendments.'"

She wants the Lib Dems to learn from junior partners in other European coalitions, such as the FDP in Germany, which recently picked a fight with its senior partners, Angela Merkel's CDU, over the siting of nuclear weapons on German soil. "I am long in the tooth and I have seen a lot of coalitions. One of the things I have learnt from the European coalitions is that the smaller parties support what they have agreed on and feel absolutely free to be critical of and make speeches about and even in some cases to abstain and vote against things that have not been discussed."

She is as passionate about her politics as ever. Speaking out, she believes, is as necessary to good politics as loyalty. The Lib Dems can learn from the SDP period, she says. "The whole argument about the SDP was that you should go for excellence. If something was an excellent public service then you didn't have to try to force it to become an excellent private service."

Today's party had to look after its own supporters as well as make the coalition work. "The danger is that it becomes irrelevant to people who are its natural constituency – people who are generally speaking progressive, somewhat left of centre, in favour of public services, not against the market, but see the market as there to run part of the scene but not all of it. And, above all, people who are extremely conscious of inequalities in society."