Background: Although the Ethiopian government has been implementing fee waiver programme to increase health service utilization there is still a gap on inclusion of indigents to the system Objective: The purpose of this study is to assess the effect of fee waiver system on health service utilization and associated factors among households in Farta District, Northwest Ethiopia, 2022. Methods: A community based comparative cross-sectional study was conducted from October 1 to November 14, 2022. The data was collected by using face to face interview. Using multi-stage random sampling technique a total of 1351 households were included in the study. Data was collected by epicollect5 and analyzed by using SPSS version 26 and STATA version 15 for binary logistic regression and propensity score match analysis respectively. Wealth status of households was computed by principal component analysis. At a p value less than 0.05, variables in multivariate logistic regression were considered as significant. Results: A total of 1351 respondents (681 fee waiver users and 670 out of pocket payers) were interviewed, with an overall response rate of 96.78%. The overall health service utilization was 52.7% (58.1% for fee waiver users and 52.7% for out of pocket payers). educational level (at 95%CI, primary (AOR=2.01 (1.17, 3.46)), secondary (AOR=4.5 (2.44, 8.30)) and college and above (AOR=5.44(2.56, 11.56))), family size(AOR=0.12; at 95% CI (0.07, 0.22)), travelling time(AOR = 4.7 at 95% CI: (3.21, 6.86 )) and travelling cost ( at 95%CI ,no cost (AOR=3.49 (1.97, 6.20 )),cheap (AOR=2.83 (1.53, 5.22))) were associated to the health service utilization among out of pocket payers. Having chronic disease (AOR=1.73 at 95%CI (1.12, 2.66)), Educational level (at 95%CI, able to read and write (AOR=. 1.71 (1.1, 2.68)), secondary (AOR=2.16 (1.24, 3.75)) and college and above (AOR=4.03 (1.78, 9.13))), travelling distance (AOR=1.44 at 95% CI (1.023, 2.02)) and Travelling cost (at 95%CI, no cost (AOR=4.26 (2.09, 8.65)), cheap (AOR=4.13 (2.38, 7.16))) were associated factors among fee waiver beneficiaries. Finally, being a fee waiver user contributes to a 14.9% (t= 4.19) increase in health service utilization. Conclusion: health service utilization among fee waiver users were higher than out of pocket payers. Educational level, family size, traveling time, traveling cost, chronic disease and payment mechanism were significantly associated with healthcare utilization among overall respondents. As a result, it is preferable to reduce transportation costs, improve transportation accessibility, raise community educational levels, raise awareness, and strengthen fee waiver programs for the poor, which may increase respondents' health service utilization level. Key words: Health service utilization, fee waiver, Out of pocket payment