This article presents a mathematical model describing flow of two fluid phases in a heterogeneous porous medium. The medium contains disconnected inclusions embedded in the background material. The background material is characterized by higher value of the non-wetting-phase entry pressure than the inclusions, which causes non-standard behavior of the medium at the macroscopic scale. During the displacement of the non-wetting fluid by the wetting one, some portions of the non-wetting fluid become trapped in the inclusions. On the other hand, if the medium is initially saturated with the wetting phase, it starts to drain only after the capillary pressure exceeds the entry pressure of the background material. These effects cannot be represented by standard upscaling approaches based on the assumption of local equilibrium of the capillary pressure. We propose a relevant modification of the upscaled model obtained by asymptotic homogenization. The modification concerns the form of flow equations and the calculation of the effective hydraulic functions. This approach is illustrated with two numerical examples concerning oil-water and CO 2 -brine flow, respectively.