The health secretary has unveiled a radical pro-market agenda for the NHS that would permit hospitals to leave public ownership to become "not for profit" companies, hand more consumer powers to patients and allow failing medical centres to go bust.

Andrew Lansley's white paper, which sparked anger from unions and some doctors, could, in the words of one analyst, herald the "denationalisation of healthcare services in England".

The plans could represent the biggest shakeup of the NHS in a generation, with a whole tier of the NHS decapitated: 10 strategic health authorities would be abolished by 2012 and the 150 primary care trusts scrapped by 2013; up to 30,000 managers face being cut or redeployed.

Lansley warned that NHS job losses were "inevitable" but said it was vital to switch cash from bureaucracy into frontline services. "The sick must not pay for the debt crisis left by the previous administration. But the NHS is a priority for reform too. Investment has not been matched by reform. So we will reform the NHS to use those resources more effectively for the benefit of patients."

At the heart of the blueprint are family doctors, who will take over the purchase of care and be overseen by an independent commissioning board and a new economic regulator. England's 35,000 GPs will be handed £80bn of taxpayers' money and be forced to form consortiums by 2013 – there will be no opportunity to opt out of the new system. These 500 consortiums will commission treatment from hospitals on behalf of patients. At present, the NHS works via primary care trusts and the Department of Health determines each trust's spending priorities, which involves managing GPs' surgeries.

The ambition is for GPs, who are, in effect, private businesses with a contract to provide services to the NHS, to help patients choose which hospital to use on the basis of detailed success rates, down to the level of individual surgeons.

Lansley's plan puts the coalition on a collision course with the medical unions and hospital staff at a time when the NHS must find £20bn of savings.

Dr Hamish Meldrum, chairman of BMA council, said: "Any reorganisation of the NHS must take place in consultation with clinicians so that it does not cause any disruption to patient services or needlessly waste the valuable time of healthcare professionals."

The "privatisation" of the NHS has caused much dissent in the medical community. Laurence Buckman, of the BMA's general practice committee, also raised concerns that sections of the white paper suggest the government "would be happy for the private sector to turn up" and be involved in healthcare. He said: "The BMA position on this is that we would not be happy [for private sector involvement]. We don't think it is necessary."

Lansley's analysis is that the NHS has suffered from a lack of competition and choice – and that the improvements over the last decade, such as major reductions in waiting times, have been driven largely by bureaucratic targets and tens of billions of pounds of extra spending. So market forces will be introduced for hospitals.

By 2014 every hospital will be a foundation trust and all will be allowed to leave public ownership while still providing public services. This would mean they could borrow "off balance sheet" – fulfilling Tony Blair's original vision of the bodies being outside Treasury control.

They will be given the choice to become mutuals, adopting a John Lewis-style model where a medical centre would be owned by the staff.

Such moves would be fiercely resisted by trade unions as new employees could be shut out of the NHS pension scheme and the plan would introduce variable pay schemes across the NHS.

David Nicholson, the NHS chief executive, warned that he wanted talks with the unions over NHS "pay and redundancy" terms. At present NHS workers can receive two years' salary if made redundant and all NHS staff earning more than £21,000 face a two-year pay freeze. Karen Jennings, Unison head of health, said the white paper was "a recipe for more privatisation". "NHS staff will feel badly let down by plans to undermine national pay bargaining. In a race to do this, the government wants employers to lead negotiations on new contracts resulting in a two-tier workforce within trusts and anomalies across the NHS."

Hospitals would also be able to cater for private patients, with the lifting of the arbitrary cap on the amount of income foundation trusts can raise from "other sources". Lansley cited the Royal Marsden, a world-famous specialist cancer treatment hospital in London, as a trailblazer. "It is no coincidence that 25% of their income is private and that helps support the quality of service, research and innovation," he said. Charities and the private sector will be encouraged to challenge the public sector by making it easier for them to sell services to the NHS. There will be no "bailouts" for hospitals who overspend and go bust – raising the spectre of bankruptcy across the health sector.

Alan Maynard, professor of health economics at the University of York, said: "You are certainly using the private sector in a much larger way than has been contemplated for decades …But whether it can work, well the proof of the pudding would be in the eating."

Although Lansley denied there would be an overhaul of the Food Standards Agency, the health watchdog which had lost a running battle with industry over a controversial "traffic light" labelling scheme, the Department of Health later confirmed its dismemberment was being considered. "As part of our wider drive to increase the accountability of public bodies and reduce their number and cost we will also consider where some of the other functions of the FSA should best sit to ensure they are delivered most effectively," it said.