OBJECTIVE: To estimate the price responsiveness of utilization of formal children's health-care services in Nepal and to use this information to model the impact on utilization of subsidies or increases in user fees. METHODS: A total of 8112 individual observations (of children aged < 15 years) from 2847 households in 274 communities were obtained from the 1996 Nepal Living Standards Survey. A logit model was applied to determine the net impact of price on a parent or caregiver's decision to seek care for a given instance of illness. The model's coefficients were used to calculate the price responsiveness of utilization decisions. FINDINGS: Parents or caregivers reported that 9.7% of children (788/8112) had been ill or injured in the previous month. Parents reported that they had sought care in 566 (71.8%) of these cases; care was most frequently sought from public providers. The price elasticity of demand for children's health-care services in the formal sector was estimated at -0.16. As prices rise, the demand curve exhibits continuous and declining price elasticity. Overall, a 100% subsidy of user fees would increase current utilization rates by 56%, while a 100% increase in fees would lead to a drop in utilization of only 12%. The differential in utilization across income groups was substantial after changes in fees were implemented. CONCLUSION: While the effect of price on the utilization of children's health-care services in Nepal is statistically significant, the size of the impact is modest. Policies to subsidize fees could increase utilization substantially, while fee increases would lead to modest declines in utilization and generate increased revenue.