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The combined effects of increasing demand for health services and declining real public resources have recently led many governments in the developing world to explore various health financing alternatives. Faced with a significant decline during the 1980s in its real per capita expenditures, the Kenya Ministry of Health (MOH) introduced a new cost sharing programme in December 1989. The programme was part of a comprehensive health financing strategy which also included social insurance, efficiency measures, and private sector development. Early implementation problems led to the suspension in September 1990 of the outpatient registration fee, the major revenue source at the time. In 1991, the Ministry initiated a programme of management improvement and gradual re-introduction of an outpatient fee, but this time as a treatment fee. The new programme was carried out in phases, beginning at the national and provincial levels and proceeding to the local level. The impact of these changes was assessed with national revenue collection reports, quality of care surveys in 6 purposively selected indicator districts, and time series analysis of monthly utilization in these same districts. In contrast to the significant fall in revenue experienced over the period of the initial programme, the later management improvements and fee adjustments resulted in steady increases in revenue. As a percentage of total non-staff expenditures, fiscal year 1993-1994 revenue is estimated to have been 37% at provincial general hospitals, 20% at smaller hospitals, and 21% at health centres. Roughly one third of total revenue is derived from national insurance claims. Quality of care measures, though in some respects improved with cost sharing, were in general somewhat mixed and inconsistent. The 1989 outpatient registration fee led to an average reduction in utilization of 27% at provincial hospitals, 45% at district hospitals, and 33% at health centres. In contrast, phased introduction of the outpatient treatment fee beginning in 1992, combined with somewhat broader exemptions, was associated with much smaller decreases in outpatient utilization. It is suggested that implementing user fees in phases by level of health facility is important to gain patient acceptance, to develop the requisite management systems, and to orient ministry staff to the new systems.