He will be replaced by Simeon Brown, while also dropping from fourth to ninth in the Cabinet rankings.
Reti was widely expected to lose the portfolio, one which has become a problem area for the government. Polls show New Zealanders are becoming increasingly concerned at the state of the health sector, which is struggling under staff shortages, governance problems, funding deficits, and the proposal to scale back Dunedin Hospital's rebuild.
Luxon said Reti had worked hard to reset the culture and performance of Health NZ, and he was confident it was heading in a better direction.
"But I have also heard Kiwis' concerns that they expect to see even more progress - ensuring they can access the care they need, when they need it," he said.
In appointing Brown to the role, Luxon said the minister had done an excellent job delivering on the government's priorities.
"Off the back of that performance, I have decided his skills are best placed to take leadership of our health system going forward," Luxon said.
Luxon said Brown was the right person to deliver "ruthless execution" in the health sector.
He said Brown wanted to speed up access to health, saying it shouldn't take two weeks to see a GP.
"I know Simeon is a father and a son... and knows what is needed."
He said record resources had gone into health, including hiring 3000 more nurses.
"Now the question is... how do we deliver the outcomes?"
Asked if having an actual doctor as Health Minister was a mistake, Luxon said Dr Reti did some "really good things".
"That gave us some good foundations... but as I look to turbocharge (health outcomes) I look to Simeon."
Asked what experience Brown had with health, Luxon said Brown had good experience managing large organisations, a good understanding of customer/patient expectations and he was "up for the challenge".
A number of Brown's portfolios have been given to other ministers. His Transport role will go to Chris Bishop, while Simon Watts will take on Energy and Local Government. At the same time, Brown has also been given the State-Owned Enterprises role.
Reti has been given a new Universities role, and also picks up Science, Innovation, and Technology. Luxon said both portfolios would play a critical role in the government's economic growth plan.
Other big changes - Lee no longer a minister, South Island role created
That plan appears to be the focus of the reshuffle, with Luxon saying he was refreshing the team to underlie his 2025 priority of economic growth - even changing the name of a portfolio to reflect it.
Finance minister Nicola Willis has been given the new Economic Growth role, formerly known as the Economic Development portfolio, which had been Melissa Lee's.
Luxon, appearing with Finance Minister Nicola Willis, insisted the government had made "tremendous progress" last year on the cost of living.
He talked up the government's tax cuts and new trade agreement, and announced Willis' new role as Minister of Economic Growth (formerly economic development).
"In 2024 Nicola did a fantastic job... and New Zealanders are now seeing the benefit of that in the form of lower interest rates and lower inflation."
Willis said she was "delighted" to pick up the role.
"Our plan is about more than simply getting through the recent economic downturn... New Zealanders deserve to live in a country where they can thrive."
Lee, the former Media and Communications minister, is no longer a minister at all.
She will be replaced as a minister outside cabinet by first term MP James Meager, who picks up the Hunting and Fishing and Youth portfolios, as well as a newly created Minister for the South Island role.
The Rangitata MP, who is chair of Parliament's justice committee and set to hear submissions on the Treaty Principles Bill, will remain in the role until the end of the select committee process, despite becoming a minister.
Cabinet minister Matt Doocey has also lost a number of portfolios, including ACC, Tourism and Hospitality, and Youth. He retains his Mental Health role and remains an Associate Health minister.
Coalition partners ACT and New Zealand First are not affected by the reshuffle, which is Luxon's second since taking office.
In April, he demoted Lee out of cabinet while promoting Watts, and took the Disability Issues portfolio away from Penny Simmonds.
While it is common for prime ministers to shuffle their decks at the start of the year, Luxon had previously said he would take a different approach to reshuffles than his predecessors, instead making changes as and when they were needed.
The reshuffle comes ahead of National's two-day caucus retreat in Hamilton next week, and a State of the Nation speech by Luxon in Auckland.
The changes will take effect from Friday, 24 January.