This paper investigates the effect of health-related expenditure on household welfare in Albania, Bosnia and Herzegovina, Montenegro, Serbia and Kosovo, all of which have undertaken major health sector reform. Two methodologies are used: (i) the incidence and intensity of ‘catastrophic’ health care expenditure, and (ii) the effect of out-of-pocket payments on poverty headcount and poverty gap measures. Data are drawn from the most recent Living Standards and Measurement Surveys, 2000–05. While our analyses are not without their limitations, and the lack of comparability across instruments precludes a direct comparison across countries, there is no doubt that health expenditure contributes substantially to the impoverishment of households—increasing the incidence of poverty and pushing poor households into deeper poverty—in each country. Both the catastrophic and the impoverishing effects of health expenditures are particularly severe in Albania and Kosovo. Transportation expenditure accounts for a large share of total health expenditures, especially in Albania and Serbia. Informal payments are substantial in all countries, and are particularly high in Albania. As countries in the sub-region continue the process of health system reform, an important policy question should be how to protect vulnerable groups from the catastrophic and impoverishing effects of health care expenditure.