Nepal has seen impressive improvementsin health outcomes and has done well both in its rate ofprogress and relative to its income level. Infant mortalityhas been declining over the past five decades to 38.6 per1,000 live births in 2009. Similarly, maternal mortality hasdecreased to 380 per 100,000 live births in 2008. Lifeexpectancy has been steadily increasing to 67 years in 2009.The rate of progress is better than those witnessed byneighboring countries. But challenges remain in addressinginequality, high and increasing out of pocket payments.Geographic and income-related inequalities in populationhealth outcomes remain large and are increasing. Forexample, not only is the decline in infant mortality notuniform, some regions have seen an increase. The policyresponse to these challenges has been to expand free careservices and pilot protection mechanism against thefinancial risk of ill health. There is growing demand toexpand the package as well as the coverage of existing freeessential health care to all Nepalese; to introduce newprograms such as health insurance, and other similarinitiatives This note identifies efficiency gains as themain potential source of additional fiscal space. Theanalysis presented herein indicates that improvement inhealth system efficiency i.e., getting more value for moneyis by far the most plausible option for realizing additionalfiscal space for health in Nepal. As the note demonstrates,the prospects for additional resources for health from allother possible sources from conducive macroeconomicconditions, re-prioritization of health, external resources,and other health-sector specific sources is limited inNepal. On the other hand, there are many indications ofsystemic inefficiencies in the health system of the countryand the challenge would be to focus on identifying andimplementing appropriate interventions to improve thesituation and reduce waste. The note highlights somespecific areas, such as those related to provider payments,drug procurement mechanisms, and hospital and district grantallocations whereby significant improvements in obtainingbetter value for money can be realized.