We describe an economic framework, including demand- and supply-side factors, for approaching the analysis and planning of health system reform in South Africa, in order to avoid piecemeal debates. We argue that there is an urgent need to re-engineer the way health facilities are internally organized to achieve better productivity and responsiveness. We argue that funding is not the central problem of the South African public health system but rather the enormous inefficiencies in management and low productivity; and that separating the purchase from the supply side is a critical component of making significant efficiency gains. Finally, we suggest that income inequalities and a divided health system in South Africa are departure points for reform initiatives. We must build on the strengths of the South African health system as we plan for the eventual achievement of a more homogeneous health-care system across the public and private sectors.