Thailand's universal coverage health care policy has been presented as a knowledge-based reform involving substantial pre-planning, including expert economic analysis of the financing mechanism. This paper describes the new financing system introduced from 2001 in which the Ministry of Public Health allocated monies to local Contracted Units for Primary Care (CUPs) on the basis of population. It discusses the policy intention to use capitation funding to change incentive structures and engineer a transfer of professional staff from over-served urban areas to under-served rural areas. The paper utilises qualitative data from national policy makers and health service staff in three north-eastern provinces to tell the story of the reforms. We found that over time government moved away from the original capitation funding model as the result of (a) a macro-allocation problem arising from system disturbance and professional opposition, and (b) a micro-allocation problem that emerged when local budgets were not shared equitably. In many CUPs, the hospital directors controlling resource allocation channelled funds more towards curative services than community facilities. Taken together the macro and micro problems led to the dilution of capitation funding and reduced the re-distributive effects of the reforms. This strand of policy foundered in the face of structural and institutional barriers to change. © 2009 Elsevier Ltd. All rights reserved.