BACKGROUND. The introduction of fundholding established an internal market in public sector health care, involving purchasers and providers contracting for the supply of health care. AIM. This study set out to examine fundholders' hospital referral patterns, and to evaluate the quality of the service provided to patients undergoing elective general surgery, as perceived by fundholding general practitioners. METHOD. A questionnaire was posted to the senior partners of all fundholding practices in the Trent Regional Health Authority area. This questionnaire requested assessments of the importance of 13 specified aspects of service quality and the quality of provision by general practitioners' most frequently-used hospitals. Five-point scales were employed in each case. Respondents were asked to provide additional details about their practice. RESULTS. A 67% response rate was achieved. Confidence in the consultant's ability, short waiting times and informative feedback from the providers emerged as the most important elements in referral decisions, while the cost of treatment and patient convenience received lower importance ratings. In terms of how well their providers were seen to perform, fundholders ranked confidence in the consultant and patient convenience highest, and style of hospital management lowest. The majority of referrals seemed to be local. CONCLUSION. Judged in terms of fundholders' perceptions, sizeable variations in service quality between hospital providers of general surgery are evident.