Uganda heavily relies on out-of-pocket payments (OOP) to finance its healthcare yet evidence shows that over 10 percent of gross household expenditure this negatively affects household welfare. More interest was in establishing the extent, distribution as well as determinants of catastrophic health expenditure and how to cope with it. The study was to establish the effect OOP has on household welfare. Using the Uganda National Household Survey data of 2005/06, the study found 28.1 percent of the households in Uganda experiencing catastrophic health expenditure, distributed among all socioeconomic groups though more among rural households. The expenditure reduces household welfare or increases poverty by 5.8 percent. Although food expenditure is protected, education and housing are affected. The study calls for government protection against catastrophic health expenditure through insurance and prepaid schemes; and boost peoples' income for increased ability to pay for care. The poverty computation methodology should be adjusted to address health expenditure to avoid understatement. The results will be used by health financing policy makers as well as health economists and planners.