Background: Nepal is an underdeveloped country in which half of the total health expenditure is from out-of-pocket payments. Thus, the Government of Nepal introduced universal free health-care services up to the level of district hospitals, and targeted these services to poor and marginalized people in regional and subregional hospitals. The aim of this descriptive study was to explore the implementation and utilization of free health-care services by the target population (poor and marginalized people) in two tertiary-care hospitals in western Nepal, one with a social care unit (Western Regional Hospital) and one without a social care unit (Lumbini Zonal Hospital)., Methods: Medical records maintained by the two hospitals for one Nepali calendar year were collected and analysed, along with information from key informant interviews with staff from each hospital and patient exit interviews., Results: Utilization of free health-care services by poor and marginalized people in the two tertiary-care hospitals was suboptimal: only 8.4% of patients using services were exempted from payment in Western Regional Hospital, whereas it was even fewer, at 2.7%, in Lumbini Zonal Hospital. There was also unintended use of services by nontarget people. Qualitative analysis indicated a lack of awareness of free health-care services among clients, and lack of awareness regarding target groups among staff at the hospitals. Importantly, many services were utilized by people from rural areas adjoining the district in which the hospital was situated., Conclusion: Utilization of free health-care services by the target population in the two tertiary-care hospitals was very low. This was the result of poor dissemination of information about the free health-care programme by the hospitals to the target population, and also a lack of knowledge regarding free services and target groups among staff working in these hospitals. Thus, it is imperative to implement educational programmes for hospital staff and for poor and marginalized people. Unintended use of free services was also seen by nontarget groups; this suggests that there should further simplification of the process to identify target groups.