Building on the experience gained in National Health Accounts and costing of the State Action Plan under the EC funded Reproductive Health Services and Sector Reform Program in AP[1], the Institute has been assisting three State Governments- Andhra Pradesh, Orissa and Madhya Pradesh, in developing medium term expenditure framework (MTEF) for Health under the DfID supported health sector reforms[2]. The exercise involved analysis of health expenditure; estimation of the resource envelope; costing of medium term strategies and development of the MTEF by reconciling bottom-up estimates of the cost of carrying out policies, both existing and new with the resource envelope available for public health expenditure. Earlier MTEF exercises in the country had dwelt primarily on making forecast of resource costs such as salary and non salary components. The exercise carried out by the IHS was path breaking in that we adopted a National Health Accounts framework. The MTEF made health expenditure projections by sources of funds, functions of care, providers and resource categories. This provided a clearer picture of: which category of providers are funds being allocated, what purpose does it serve; and what resource costs are entailed. The MTEF exercises provided in-depth understanding of the budgeting processes; increasing role and flow of off-budget financing, financial management systems and areas of under-spending. The MTEF prepared provides forecast at the State level which has been estimated based on pooling of requirements of various spending heads and does not provide district wise allocation of resources which is a much more effective planning tool. IHS is currently working with the Department of Health and Family Welfare under a DfID funded contract[3] to establish criteria and mechanism to allocate resources to districts with specific focus on under-served areas. Through strong links into district planning, the exercise seeks to allocate resources based on health service and health facility requirements. Judgments as to which districts are underserved, and to what degree, would be formed on the basis of population information, direct measures of morbidity; mortality ratios as an overall proxy for different levels of health need; and specific indicators of deprivation. Under a separate contract with the Government of Andhra Pradesh the Institute is providing technical assistance in rolling out the MTEF for 2008-09.