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This paper formulates the situation that a large hospital and a small hospital compete for the quality of chronic medical services using Hotelling’s model and examine whether efficiency of chronic medical service and minimization of public health expenditure can be achieved simultaneously designing different hybrid chronic medical fee systems for each hospital. The main results were derived as follows. First, if both hospitals behave selfishly, then the abovementioned conditions can be achieved. Second, if the large hospital acts altruistically, then it selects excessive medical service whereas the small one provides inadequate levels. Third, in the case in which there is a brand effect for large hospital, I show by numerical example the possibility that the abovementioned conditions can be achieved by making the total reward of the large hospital greater than that of the small hospital. However, the number of patients for each hospital is not optimal.

Medical Service Competition among Heterogeneous Hospitals and Optimal Hybrid Medical Fee