This paper attempts to examine the prospects and challenges associated with liberalising trade in health services in five South Asian countries, namely Bangladesh, India, Nepal, Pakistan and Sri Lanka. Country‐specific secondary information, a brief literature review of empirical studies and debriefing sessions with key stakeholders are employed to explore the issues related to liberalising health services trade. The health sectors in India, Nepal and Pakistan are scheduled under General Agreement on Trade in Services (GATS) classification, whereas those in Bangladesh and Sri Lanka are not. In Bangladesh, there is opportunity for investment in joint venture hospitals under Mode 3. Nonetheless, India is the largest trader in health services under all four modes. In Sri Lanka, cross‐border trade in healthcare services is found to be insignificant. Moreover, expertise in eye treatment in Nepal could also attract foreign investment in medical services under Mode 3. In contrast, Pakistan exhibits no potential under Mode 4, because of a lack of healthcare professionals. In this view, the prospects of trade in health services within the South Asian region under the four GATS modes are constrained by infrastructural, regulatory, perception‐related, logistical and cultural problems. Considering the level of development and commercial opportunities, regional integration in the health sector could be explored in such areas as telemedicine, medical tourism, cross‐border investment and capacity building of health personnel. These developments call for stronger and pro‐active government‐to‐government collaboration in the South Asian Association of Regional Cooperation (SAARC) region in a transparent and accountable manner. Copyright © 2013 John Wiley & Sons, Ltd.