OBJECTIVE: 1) To estimate the relationship between hospital competition and prescribing oral hypoglycemic agents (OHAs). 2) To estimate the relationship between hospital competition of three accreditation levels; medical, regional, and district hospitals, and prescribing OHAs under various market structures. METHODS: Major data were obtained from National Health Insurance (NHI) Research Database during the period 1997 to 2001 and the ATC 7- digit coding system of NHI Pharmaceutical Subsidy. Hospital market was defined by geographic boundary, and hospital competition was measured by Herfindahl-Hirschman index. Two types of prescribing behaviors are defined: prescribing new OHAs implied higher prescribing quality and prescribing the OHAs with higher risk of hypoglycemic effect implied poor prescribing quality. RESULTS: There were 2110 observations of hospitals and 158,655 observations of outpatient visits documented with diabetes in six years. There was a positive relationship between hospital competition and prescribing poor quality OHAs in overall hospital markets (Adj. R2 0.40, p <0.05). Identifying the competition of each accreditation level of hospital, there was a negative relationship between regional or district hospital competition and prescribing poor quality OHAs in the market distributed three accreditation levels of hospitals (Adj. R2 0.27, p <0.01; Adj. R2 0.29, p <0.05). However, there was a positive relationship between regional hospital competition and prescribing poor quality OHAs in the market distributed regional and district hospitals (Adj. R2 0.43, p <0.01). CONCLUSIONS: We found the negative impact of hospital competition on the prescribing quality in general hospital markets. In addition, our result implied market mechanism may improve the prescribing quality of regional and district hospitals in the market distributed three levels of hospitals. We presumed there might be abundant medical resources in the market distributed three levels of hospitals, likely being able to provide more pharmaceutical services and information for alleviating asymmetric information.