The objective of this paper is to investigate the institutional capacity of health in the implementing national policy of EthThe objective of this paper is to investigate the institutional capacity of health in the implementing national policy of Ethiopian Health, in case of Bishoftu town. Survey questionnaire was administered for 133 sample respondents that were selected using multistage cluster sampling . In doing this, both qualitative and quantitative data were used in order to explore and describe the capacity of local government in Bishoftu town. The study found out that despite the commitment of the government to implement the policy in all tiers of health institution, the government failed to effectively institutionalize the national policy in the local government in the way that could respond to the users need. As such health institutions in the Town have failed to address the problem of health service delivery due to a number of capacity challenges and problems in their jurisdiction. The health institution in Bishoftu town suffer from limited institutional capacity such as shortage of human resource professionals and experts; lack of adequate material resource such as finance, office equipment’s and building for permanent office; limited policy knowledge and understanding, lack of institutional experience are among the capacity problems faced by the governments in the town in discharging their responsibilities. This in turn resulted in poor quality service to the community in general. In order to improve the capacity of the actor in the town government must consider and reconsider the local levels in the national policy and establish strong institution at the grass root level to make the service more responsive to the community. Key words: Institutional Capacity, Institution, Health Policy and Policy Implementationiopian Health, in case of Bishoftu town. Survey questionnaire was administered for 133 sample respondents that were selected using multistage cluster sampling . In doing this, both qualitative and quantitative data were used in order to explore and describe the capacity of local government in Bishoftu town. The study found out that despite the commitment of the government to implement the policy in all tiers of health institution, the government failed to effectively institutionalize the national policy in the local government in the way that could respond to the users need. As such health institutions in the Town have failed to address the problem of health service delivery due to a number of capacity challenges and problems in their jurisdiction. The health institution in Bishoftu town suffer from limited institutional capacity such as shortage of human resource professionals and experts; lack of adequate material resource such as finance, office equipment’s and building for permanent office; limited policy knowledge and understanding, lack of institutional experience are among the capacity problems faced by the governments in the town in discharging their responsibilities. This in turn resulted in poor quality service to the community in general. In order to improve the capacity of the actor in the town government must consider and reconsider the local levels in the national policy and establish strong institution at the grass root level to make the service more responsive to the community. Key words: Institutional Capacity, Institution, Health Policy and Policy Implementation