This paper analyses the incentive properties of prospective payment systems for hospital contracts, a key feature in many health systems' reforms. Building on current literature, the model explicitly allows for the existence of waiting time, modelled as adversely affecting patients' utility and therefore reducing social welfare. The model shows that rewarding hospitals for their demand leads to the first best solution, identified with respect to the relevant quality and quantity variables. The additional separate payment of a price per case is instead required when the social cost of waiting is introduced alongside the private costs. * Aknowledgments I would like to thank my PHD supervisor at Warwick University Prof. Norman Ireland, whose guidance and advice have assisted considerably in the direction and completion of this work. Thanks go also to the very useful comments of an anonymous referee. Usual disclaimers apply.