New targets for treating cancer, heart disease and strokes will be published within six months, say Welsh ministers.
A NHS overhaul will involve centralising some specialist services and treating more patients at home.
Health Minister Lesley Griffiths said there was a "compelling" case for reform, but insisted district general hospitals will not close.
She set out Labour's "vision" for meeting the big challenges facing the NHS over the next five years.
The Welsh government has a long-standing ambition to treat more people at home instead of in hospitals.
But its latest document - called "Together for Health" - takes it "that bit further", Ms Griffiths said.
The document says there are "acute difficulties" recruiting specialist staff, and says an ageing population is placing more demands on the system at a time of shrinking public spending.
Ms Griffiths said: "There's absolutely a compelling need for change to the NHS in Wales.
"We need to rebalance how many of the services we have are delivered."
Ms Griffiths, who faces pressure from opponents to protect hospitals, added: "No district general hospitals will close."
Changes to local and community hospitals will need to be accompanied by an explanation of how those services will be provided, she said.
'Quality of care'
Certain specialist services will be centralised, where clinically justified.
Because so few patients are in hospital with complex conditions, Ms Griffiths said, they "do not receive the highest possible quality of care because staff treat relatively few numbers of such patients compared to patients with other conditions".
NHS Wales medical director Dr Chris Jones said: "At present we are too dependant on the hospital sector."
He added: "We don't want to downgrade anything. We want to improve everything."
Details on specific changes are not yet available - the minister is due to discuss local health boards' (LHBs) proposals for reorganisation at the end of the month.
But she has already started to prepare the ground for some difficult decisions, saying she is prepared to "take the flak" and establishing an independent board to review LHBs' proposals.
The government promised better information on how the NHS is performing, with "clinically-focused targets" and a requirement for LHBs to publish data on key priorities such as cancer, cardiac care and stroke services.
A compact between the NHS and the public will be drawn up next year "to ensure people have the information they need to take responsibility for their own health".
Plaid Cymru health spokeswoman Elin Jones said the minister's statement would give LHBs the green light to downgrade hospitals and centralise services.
She said Labour did not have a political mandate to change hospital services.
Ms Griffiths accused Plaid of "peddling myths" and said voters had rejected the party's "scaremongering".
Welsh Liberal Democrat leader Kirsty Williams said that after three strategic plans for the NHS since devolution, Tuesday's statement felt like "Groundhog Day".
Conservative assembly leader Andrew RT Davies criticised the government for taking so long to present its plans for the health service after May's election, which takes up 40% of its budget.