In July 1993 some major structural changes were introduced into the New Zealand health system. The main feature was a separation of the purchasing and providing functions that had previously been performed by area health boards. This paper describes the reasons for and nature of the original (1991) proposals, together with changes that have been made subsequently. It discusses the nature of the contracting environment between purchasers and providers, including the integration of primary and secondary funding, the flexibility of contractual arrangements, and the degree of competition. Some information is provided on progress to date, including the impact on quality of services and accountability of providers, as well as some more tangible measures such as changes in throughput, waiting lists, and expenditure since the restructuring took place. The paper concludes that the success or failure of the purchaser-provider split in New Zealand appears to hang crucially on the contractual arrangements which are struck between purchasers and providers. In the longer term, purchasers are likely to encourage the vertical integration of primary and secondary care providers into managed care organisations styled along the lines of health maintenance organisations. Hence the purchaser-provider split may best be viewed as a temporary structure which provides a pathway towards the desired end, that is, more managed and coordinated patient care provided by vertically integrated organisations which were unlikely to emerge under the previous arrangements.