Prior research on the presence of medical pluralism and factors affecting utilization patterns within such societies/systems have been able to provide only variable oriented explanations. This paper draws on differentiation theory to provide a theoretical framework for understanding the context of medical pluralism in the developing countries. For the purpose, the South Asian country of Nepal is selected as a basic example. It is inferred that the arguments/theory presented in the paper will be applicable to other third world societies which have medical pluralism as well. This paper suggests that differentiation in these third world societies has not resulted in the formation of a single formal health care complex as in most developed countries. For example, in Nepal three overlapping and competing health care systems (folk, traditional, modern) have evolved producing a pattern we call “incomplete differentiation” in which there are no clearly demarcated boundaries separating the responsibilities of each health care system. Furthermore, in this incompletely differentiated system, modern medicine faces stiff competition with the folk/traditional health care systems over cultural legitimation.