Health service funding mechanisms are pivotal in the pursuit of health system objectives, as they provide strong financial incentives for actors in the system to achieve policy goals. Underpinning funding mechanisms is a set of key economic principles, or objectives, that should guide their design and use: efficiency, equity, and accountability. The Australian health system has historically performed relatively poorly in relation to these objectives, with evidence of inefficiencies, inequities, and poor accountability in many areas of health services. The primary cause of these shortcomings may lie in the complex set of funding and delivery arrangements at the State and Federal levels of government. Potentially significant improvements in the performance of the health system would be available from the integration of the funding and delivery of services within a single tier of government, coupled with the development of a national weighted capitation approach to funding. To develop a national capitation funding model a number of unique factors require consideration, including the current fragmentation of services, the role of the private sector, the needs of indigenous populations, and the effects of rurality. The data available to develop a capitation model is of a level of detail and quality not readily found elsewhere. If policy statements promoting efficiency, accountability, and particularly equity are to be actively pursued, a national capitation model based on robust methods should become a cornerstone of Australian health system reform.