Although decentralization has been widely implemented in health systems, there is little agreement as to how it should be defined or the outcomes it should produce. This article develops a functional typology based on political, administrative, and fiscal dimensions of decentralization. It utilizes these three categories to identify and highlight key theoretical issues concerning decentralization, emphasizing the likely advantages and disadvantages that decentralization can be expected to generate. It then examines the usefulness of this functional framework in explaining recent policy-making decisions within a number of tax-based health systems in Western Europe. The article concludes by suggesting that this three-part typology can be helpful to both policy makers and academics in evaluating the effectiveness of decentralization as a policy mechanism within health care systems.