The government is installing Health NZ Te Whatu Ora's board chair Lester Levy as a commissioner, replacing the organisation's board.
The organisation will also be split into four regions, with a deputy chief executive brought in for each region.
The board normally has seven members but this is down to two, after three members opted not to serve another term and two others resigned with more than a year remaining.
Levy was recently appointed chair of the organisation, and will take over as Commissioner for 12 months.
Health Minister Shane Reti announced the move alongside Prime Minister Christopher Luxon at the weekly post-Cabinet media briefing on Monday, saying it was a response to "serious concerns around oversight, overspend and a significant deterioration in financial outlook".
Dr Reti said Health NZ was heading towards a $1.4 billion deficit by the end of the financial year, initially reported to him in March.
"In the months since, the situation has worsened. Health NZ is currently overspending at the rate of approximately $130 million a month," he said.
Luxon said there was a lack of performance management at the organisation, an overly centralised system that led to a "massive bureaucracy" of management, and finally financial mismanagement.
He said it was not an issue of lack of funding, but the failures "do require an urgent and significant intervention". He pointed to the government having invested an additional $16.3b into the health system from the next three Budgets.
"We've put all the money in, we've stumped up and put money forward."
Levy would be tasked with saving $1.4b, focusing on cost efficiencies including "any back-office bureaucracy which has blown out, particularly in middle management".
Reti blamed the previous government, saying the "botched health reforms have created significant financial challenges at Health NZ".
"The issues at Health NZ stem from the previous government's mismanaged health reforms, which resulted in an overly centralised operating model, limited oversight of financial and non-financial performance, and fragmented administrative data systems which were unable to identify risks until it was too late."
He said the overspend was a combination of things including back-office staff and outsourced personnel, and pointed to a report by the Office of the Auditor-General which identified a lack of an operating framework.
Dr Reti said he had previously appointed a Crown Observer, a new chair and a board member with financial expertise to tackle the financial problems at the organisation, and bringing in a Commissioner was the strongest ministerial intervention available under the Act.
He said it was not a decision he had taken lightly, "however the magnitude of the issue requires such action".
"Lester Levy has assured me there will be no adverse impacts on the delivery of care in implementing a turnaround plan - rather, he and Health NZ will be seeking to bring the frontline closer to decision-making."
'This year's Budget didn't contain enough funding for health' - Labour
Labour leader Chris Hipkins told reporters at Parliament the government's framing of the situation at Health NZ was a misleading, brazen and desperate attempt to pin responsibility for its own decisions on the previous Labour government.
"This year's Budget didn't contain enough funding for health. The consequences of that are now becoming evident. And I think New Zealanders can see that actually, the situation in health has all emerged under this government's watch.
"The current issues that they're talking about today, all happened during their time in government."
He said it was just spin, and a desperate attempt to cover up the inadequate funding for health in this year's Budget. The processes Reti was talking about to bring Health NZ together were already "well under way," under Labour, he said.
"There were already four regions identified by health in New Zealand, so that work was already in train. The work to reduce duplication was already in train - one of the reasons for putting all of the DHBs together was so that we could reduce those layers of management. So all of that work was already under way.
"Those changes don't happen overnight. And you don't see all of the results of those changes overnight. But it is important that we get to the root cause of some of these problems. Government spin isn't going to do that."
Labour's health spokesperson Ayesha Verrall said having just one point of recruitment rather than 20 DHBs all competing to recruit staff enabled the government to hire more staff for the health system when the country came out of its Covid-19 response phase.
She said the reforms also helped end the postcode lottery, and allowed infrastructure decisions to be considered across the whole of the system, and ensure there was expertise in place to manage that.
"I don't accept what the government said today - that there have been a growth in middle management over five years - as a cause for one year's budget trouble under their watch. That is absolutely untrue."
She said there may have been a growth in nursing staff during that period, but that was desperately needed.
Review updates from the briefing on RNZ's blog: