The purpose of the study was to examine the effect of catastrophic Out-of-Pocket health expenditure on household poverty in Uganda and propose measures that can guard against it so as to improve health outcomes as specified in the Millennium Development Goals. Specifically, the study aimed at establishing the effect of Out-of-Pocket health expenditure on welfare/poverty and based on the hypothesis that the country experiences catastrophic health expenditure. The study utilized the Uganda National Household Survey data of 2005/06 and change in Poverty Headcount Ratios computed using gross and net household expenditures as a proxy for income. The national catastrophic headcount ratio was found to be 19.33% (28.08% after adjusting for zero expenditure) and catastrophic health expenditure was found to exist among all socioeconomic groups although it was more among rural households and the non-poor. Direct Out-of-Pocket health expenditure increases household poverty by 5.81% or reduces welfare by the same percentage. The poverty gap was increased by Uganda Shillings 432 on average and this was 7,146 at the maximum representing more than 10% increase in some instances. The paper argues for government plans to protect the population against catastrophic expenditure through provision of free health care for all or at worst facilitate the establishment of prepaid schemes at all levels if it cannot speed up the National Social Health Insurance Scheme. The methodology for computing poverty numbers should always address health expenditure since it is not welfare maximizing.