One area where spending discipline will become increasingly important in Hungary is health care. This paper describes the structure of the health care system, highlights outstanding weaknesses and considers ways to make financing more stable and sustainable. The slow progress in modernising the health care system is reflected in the low efficiency of hospitals, excessive recourse to inpatient care and heavy prescription of drugs by doctors. The paper discusses ways to modernise the hospitals, including options for giving them more scope in managing resources and greater incentives to introduce efficiency enhancing improvements. To help reduce unnecessary use of inpatient services, mechanisms are suggested for strengthening the "gatekeeping" function of general practitioners and for reinforcing controls over treatment decisions. The paper also considers ways to contain the cost of subsidies to pharmaceutical companies.