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For improving the current pricing mode of medical services, the present study seeks to explore the pricing elements and processes, and establish the dynamic pricing model of involving both the government and hospitals. The pricing process and mathematical model show the logical relationships between medical prices and pricing elements. The causal relationship model reveals how to accomplish dynamic equilibrium between elements. The simulation model has been built based on system dynamics theory. Results of the simulation and sensitivity tests show that different grades of hospitals while applying the pricing model may better perform their respective responsibilities and continuously improve core strengths. [ABSTRACT FROM AUTHOR]