The casemix funding arrangements introduced in Victoria on 1 July 1993 represent a significant departure from the previous approaches to public hospital funding in Australia. They are designed to change the economic incentives on hospitals by linking payment to the number and case complexity of patients treated. The new funding arrangements include a combination of fixed and variable payments to hospitals for inpatient services. Outpatient services remain funded on a historical basis. Special payments are made for teaching and research functions. Total payments to hospitals are capped through operation of an 'Additional Throughput Pool' which allows price to fluctuate inversely with volume to ensure an expenditure limit. Because of operations of specific conditions on the Additional Throughput Pool, hospitals were given an incentive to reduce waiting lists. Despite the success in reducing waiting lists and budgets, there are a number of problems with the casemix approach including both technical issues (how are payment rates to be updated?; the failure to address problems of capital) and ethical issues. These are discussed in the paper.