In 1990, Kupat Holim Clalit (KHC), Israel's largest sick fund, initiated a demonstration programme for transforming a number of primary care clinics in the Negev district of southern Israel into autonomous budget-holding units. Four programme components were implemented in the nine participating clinics: allocation of a fixed budget; expansion of day-to-day decision-making authority; establishment of a computerized information system to produce monthly reports on expenditure; and provision of incentives for budgetary control. The research findings are based on a four-year evaluation of the programme, which involved a longitudinal case study conducted with multiple research tools: in-depth interviews, a staff survey, and analysis of relevant documents. This article analyzes the challenges involved in implementing the demonstration programme. It examines clinic staff evaluation of the implementation process (e.g. overall staff had a positive attitude toward it); assesses staff satisfaction with clinic participation in the programme (while only 33% were satisfied, only 21% said they would like the clinic to revert to the pre-programme model) and factors influencing this satisfaction (among them intrinsic benefits, perception of the programme as fair and age); and discusses the lessons to be learnt from the programme regarding effective implementation of organizational change. The main lessons indicate the importance of certain factors in implementing such programmes: (a) long-term management commitment to the programme; (b) appointment of agents of change/programme administrators; (c) establishment of a formal agreement between the parties involved; (d) establishment of communication channels between the parties involved; (e) intrinsic benefits for staff, perceived as incentives to economize; (f) reliable date, perceived to be reliable by the parties involved; (g) staff participation in the process of change; and (h) involvement of the participating unit as a single entity.