Abstract: The essential relation between administrative department of basic medical insurance fund and public hospital is the relation between demand and supply of healthcare. Consumer paramountcy theory, managed (care) competition theory and cost matrix theory can be the theoretical foundation to establish ideal relation between administrative department of basic medical insurance fund and public hospital. The reform of public hospital in the future should move towards the following:public hospital should be de-administration and become independent market player, administrative department of basic medical insurance fund should purchase basic health care from public hospital by means of negotiating, the reimbursement of basic medical insurance should transform into payment for performance, the competition should be carried out among public hospital and non-public hospital, industry supervision should be strengthen after separating of medical treatment and drug sale, leading position of administrative department of basic medical insurance fund should be assured in the course of procurement tenders of drugs, regional planning of health resource should be improved and management of administrative department of basic medical insurance fund should be optimized further.