Until relatively recently, there have been few attempts to introduce strong forms of competition into publicly funded hospital systems, whether in Australia or elsewhere. The Victorian government has done so by implementing a casemix funding formula from July 1993 and in the process has foreshadowed that the least efficient hospitals will close. While it is of vital importance to improve the efficiency of Australian hospitals, and a key factor is to use casemix funding to achieve microeconomic reform, it is not appropriate to use competition to close hospitals. Arguments against using marketplace forces to determine the fate of hospitals include: the difficulties that could ensue with an inappropriate distribution of hospitals in Victoria; the necessity to provide hospital services for the public good; whether reducing the public sector is actually economically beneficial; and the conclusion reached by many in the United States, that health care should not be treated as a commodity. I argue for the development of a more sophisticated policy than one which uses the principles of laissezfaire and relative efficiency to close public hospitals.