The use of performance contract as a performance strategy has been acclaimed as an effective and promising means of improving the performance of public sector. The objective of this study was to explore on the effect of the Government‟s performance contracting strategy on the performance of public health institutions in Kenya. Despite the availability of extensive existing literature on the effect of implementing performance contracting in various public sectors in Kenya, there is no information on its implementation effect on the performance in the health sector in Kenya. The research was an explanatory survey; since it‟s aimed at describe the state of affairs as they exist at present and why. The specific objectives of the study were to determine the effect of PC agreement; the effect of PC appraisals and the effect of PC awards and sanctionson organizational performance of public health institutions in Kenya. The target population an the sample size were all the public health institutions in Nairobi and Kiambu Counties. The study adopted census inquiry. The study used a Likert type 5-scale questionnaire to collect quantitative primary data. The Secondary data was obtained from the documentary analysis of the existing customer/employee satisfaction survey reports, analysis reports on service charters and customers‟ complains/complements, staff performance appraisals and ISO audits findings. Data was analyzed using descriptive statistics (percentages, means and standard deviations) and inferential statistics (Pearson Correlation and Multiple Regression Analysis). There was positive influence of performance contracting agreement, appraisal and awards and sanctions. From the multiple regression model, all the predictors accounted for about a third of the variation in organization performance in health sector. There was significant effect of performance contracting agreements, appraisals and awards and sanctions on organization performance. Adoption of performance contract in health sector enhances the ability to discharge duties through the setting substantial Hospital‟s PC targets. The evaluation feedback mechanism and information was effective, with performance monitoring, evaluation and appraisal mechanisms timely for corrective/review measures.