Many health-care systems allocate funding according to measures of need. The utilisation approach for measuring need rests on the assumptions that use of health care is determined by demand and supply and that need is an important element of demand. By estimating utilisation models which allow for supply it is possible to isolate the socio-economic and health characteristics which affect demand. A subset of these variables can then be identified by a combination of judgement and further analysis as needs variables to inform funding allocations. We estimate utilisation models using newly assembled data on admissions to acute hospitals, measures of supply, morbidity and socio-economic characteristics for 8414 small geographical areas in England. We make a number of methodological innovations including deriving additional measures of specific morbidities at small area level from individual level survey data. We compare models with different specifications for the effect of waiting times and provider characteristics, with total, planned and unplanned hospital admissions, and estimated at small area (ward) and primary care organisation (general practice) level. After allowing for waiting times, distance, capacity and the availability of private health care, measures of mortality, self-reported morbidity, low education and low income increase the use of health care. We find evidence of horizontal inequity with respect to ethnicity and employment and suggest a method for reducing its effects when deriving a needs-based allocation formula. Copyright © 2003 John Wiley & Sons, Ltd.