China has continuous reforms in health sector since its economic reform in 1978. The purpose of this thesis is to examine the health sector in China and provide policy recommendations for healthcare reforms. A historical review on the reform process provided implications of challenging problems in China’s health sector. Hospitals are classified into three grades and prices for healthcare services are regulated. It is believed that efficiency could be improved by applying more appropriate pricing scheme. A quality competitive model of hospitals under regulated price was developed in this thesis. The author analyzed the effect of expanding price difference among hospitals within the model. The results of the model demonstrated that hospitals have higher incentive to improve healthcare quality after increasing regulated price. However, the impact of expanding price difference depends on other socioeconomic conditions. Hence policymakers need to pay careful attention to various aspects of the health sector when applying this strategy.