Low- and middle-income countries (LMICs) have been searching for effective strategies to reform their inefficient and wasteful public hospitals. Recently, China developed a model of systemic reforms called the Sanming model to address the inefficiency and waste at public hospitals. In this article, we explain and evaluate how the Sanming model reformed its 22 public hospitals in 2013 by simultaneously restructuring the hospital governance structure, altering the payment system to hospitals, and realigning physicians' incentives. By employing the difference-in-difference (DID) method and using the hospital-level data from 187 public hospitals in Fujian province, we find that the Sanming model has reduced medical costs significantly without measurably sacrificing clinical quality and productive efficiency. The systemic reform, on average, has reduced the medical care cost per outpatient visit and per inpatient admission by 6.1% (P-value = 0.0445) and 15.4% (P-value < 0.001), respectively. It is largely accomplished through a decrease in drug expenditures per outpatient visit and per inpatient admission of about 29% (P-value < 0.001) and 53% (P-value < 0.001). These results show that the Sanming model has achieved at least a short-term success in improving the performance of the public hospitals. These findings suggest that such a systemic transformation of public hospitals, where the governance structure, payment system and physician compensation methods are aligned, are crucial to improving their performance; it holds critical lessons for China and other LMICs.