An important strategy to make a better use of the scarce resources available to the health sector in developing countries should focus on strengthening the referral system. Hospitals overcrowded with patients who could be more cheaply treated in smaller facilities is a common feature of poorly functioning referral systems. After defining what is meant by referral system, the paper discusses the main problems affecting its implementation within a primary health care strategy in developing countries. The essential prerequisites for an effective referral system are then discussed, emphasizing the need for a clear division of tasks between the different levels of the health delivery system. The paper concludes that efficiency gains and improvement of access are the most likely outcomes of a well-functioning referral system.