Nicaragua has embarked on a reform of the way in which publicly provided medical care is organized and financed. A principal feature of the reforms includes a decentralization of decision-making authority coupled with an increase in local accountability. Local decision-making authority has been increased by allowing managers more freedom to allocate inputs. Accountability has been strengthened by stipulating what is expected of hospitals and health centres in the form of performance agreements, and tying rewards (i.e. bonuses) to the satisfaction of these requirements provides incentives. This paper provides a critical assessment of these reforms, and presents some early evidence of their effects.