A policy of allowing public hospitals to provide some better quality, higher priced hospital beds for those able to pay was introduced as government policy in Indonesia after 1993. A study was conducted in 1998 in three public hospitals in East Java to investigate if the policy objective of cost-recovery was being achieved. Hospital revenue from these commercial beds was less than both the recurrent and total costs of providing them in all three hospitals, but exceeded recurrent costs minus staff salaries in two hospitals. One reason for the low cost-recovery ratios was that between 55% and 66% of the revenue was used as staff incentives, mostly to doctors. This was more than the maximum of 40% stipulated in the policy. The high proportions of total revenue going to staff were a result of hospital management having set bed fees too low. The policy may be contributing to the retention of doctors within public sector employment; however, it is not achieving its stated objective, especially over the longer term where full recovery of salaries and investment costs needs to be considered. Public hospitals that wish to invest in commercial beds need effective management and accounting systems so as to be able to monitor and control costs and set fees at levels that recoup the costs incurred. Further research is required to determine if this form of public-private mix has negative effects on equity and access for poorer patients.