Up to 500 jobs will be lost as a result of the creation of a National Health Board (NHB), Health Minister Tony Ryall said today.
Cabinet agreed the NHB would be established within the Ministry of Health.
It would oversee areas such as IT, payroll, procurement and logistics, where there had been duplication from 21 District Health Boards (DHBs).
"The public health service needs to stop reinventing the wheel 21 times," Mr Ryall said.
The 500 job losses were in addition to 200 vacancies that were scrapped earlier in the year, saving $20 million.
Labour's health spokeswoman, Ruth Dyson, said it was hard to work out why a new bureaucracy was needed to manage the existing bureaucrats.
"It seems to me that these are functions that could be done within the existing system but instead the minister is proposing to set up an entirely new business unit within the Ministry of Health."
Ms Dyson said it appeared that a lot of local decision-making was being taken away from DHBs, and that was a bad thing.
"If we see the ability to be flexible and responsive to local needs, and local solutions being taken away from the DHBs, then our communities will lose out."
Mr Ryall said up to $700 million over five years should be saved by the NHB handling the bulk purchasing and national cooperation.
The NHB would incur one-off set-up costs of $5m-$10m, Mr Ryall said.
The Government chose to have the NHB within the ministry because it was cheaper and provided "faster improvements".
The ministry has around 1475 staff. About 180 people will lose their jobs and 400 will move to the NHB.
The ministry has a historical rate of about 15 percent attrition and volunteer redundancies.
The remaining 320 job cuts will come from DHBs over time as more cooperation takes place, Mr Ryall said.
The NHB was a recommendation from the ministerial review group, which made more than 170 other recommendations.
Many of the group's proposals were already under way and others were still being considered, Mr Ryall said.
The NHB was expected to be in place by Christmas.
Money saved from bulk purchasing and the nationalisation of services would be redirected to the frontline, Mr Ryall said.
He said all of the money would remain within the health budget.
Some programmes and funding controlled by the ministry would move out to the local level and greater regional cooperation between neighbouring DHBs was expected.
DHBs would not be merged, Mr Ryall said.
"We shouldn't have 21 DHBs with 21 IT systems that can't talk to each other," he told reporters.
However, it was not about having one national computer system, he said, but rather having rules in place to ensure the different systems were compatible.
The changes would need to be "clinically led" and clinicians supported the idea of national co-operation in specialised areas.
"This is about making the current system work better by filling in the missing links," Mr Ryall said.
Prime Minister John Key said the public needed to get better productivity out of the health system.
"We need to produce better results for the same amount of expenditure ... we want to move resources away from the bureaucracy and the back room."
Mr Key said he hoped the job cuts would "largely" be covered through attrition and voluntary redundancies.
Should fluoride in water be the responsibility of central government?