ne of the main parts of the health sector is university hospitals, as providers of highly professional tertiary health care services as well as knowledge transfer system for any level of health service providers. Creation of a fair and effective system of financing of in-patient care is a significant part of health financingpolicy reform and the payment model has a direct impact on health services delivery. Starting in 2014 Latvia introduced equalized payments by diagnosis-related groups (DRGs) to pay a flat rate for average costs. This created cost shifting and other negative provider behaviours included misclassification of treatment without clinical justification. This leads to the necessity for the government to monitor and evaluate activity against baselines and regulate compliance to achieve the policy intent of the payment system. In terms of managing risk, there is a need to define national-level financing policy, to establish an effective overall cost-control mechanism. The purpose of this article is to identify the main determinants of the university hospital behaviour and based on international experience propose payment system model taking into consideration Latvian university ‘tertiary’ hospital needs. As the empirical basis for research statistical data of National Health Service and interviews. In the paper comparative analysis, empirical analysis, statistical data processing including the deductive and synthesis methods are used. Main challenges identified include insufficient data in health care institutions, interference from interest groups, the need to adjustpayments to separate capital costs and depreciation and teaching tasks in university hospitals. Lessons for health care financing policy reforms include the continuation of specific financing model to facilitate access to knowledge and provider decision autonomy in university hospitals in Latvia.