We examine how public sector third-party purchasers and hospitals negotiate quality targets when a fixed proportion of hospital revenue is required to be linked to quality. We develop a bargaining model linking the number of quality targets to purchaser and hospital characteristics. Using data extracted from 153 contracts for acute hospital services in England in 2010/11, we find that the number of quality targets is determined by the purchaser's population health and its budget, the hospital type, whether the purchaser delegated negotiation to an agency, and the quality targets imposed by the supervising regional health authority
