In recent weeks, director general of commissioning Duncan Selbie and director general of health and care partnerships Professor Antony Sheehan have both left Whitehall for jobs in the NHS.
Mr McCarthy will leave the DoH in May, and his post will be covered in the short term by his number two Una O'Brien.
In an e-mail to colleagues he said: 'This is not about my job - I have enjoyed enormously establishing and leading the directorate; and I am very proud of our achievements. But I am afraid it is simply not compatible with the needs of my family in Leeds.'
NHS Confederation chief executive Gill Morgan said: 'Mr McCarthy brought a combination of policy-making skills and civil service experience together with an understanding of the NHS.'
Before his role as DoH director of policy and strategy, Mr McCarthy was the department's director of financial system reform.
The confirmation of Mr McCarthy's departure follows press reports that NHS chief executive David Nicholson was gathering an NHS board separate from departmental structures..
A DoH source said that the development of a 'headquarters function' remained within the DoH, but that 'the nucleus could easily be changed in the future'.
Departmental sources denied that any interviews had been carried out for a rumoured new chief medical officer post, dedicated to the NHS and separate from Sir Liam Donaldson's DoH post. However, they said Sir Liam was 'relaxed' about the possibility of such a post being created.
The Health Select Committee is expected to recommend that the unheralded visiting rights of patients' groups should continue, when it publishes its report on patient and public involvement in the NHS tomorrow.