Economic recession prompts governments and health service ministers to seek increased efficiency in the production of hospital services in order to reconcile increasing demands with scarce resources. As one approach to the problem, the National Health Strategy is recommending pilot schemes, similar to those which have been introduced in both the United Kingdom and the Netherlands, which involve the separation of purchaser from the provider of hospital services. It is argued that such separation, with the introduction of competition between providers of hospital services for contracts placed by publicly funded Area Health Boards, will increase efficiency and accountability in the use of resources. However, this argument ignores the hospital management's ability to keep costs down by altering the quality of hospital care in ways which are difficult to monitor by purchasing agencies. The article considers the effects the introduction of managed competition is likely to have on the quality of hospital services. The outcome is uncertain and competition may improve some dimensions of quality while jeopardizing others. If managed competition is tried in Australia, the opportunity should also be taken to examine its impact on the quality and outcomes of hospital care.