This paper develops an integrated model applying queueing theory and game theory for the referral system. Patients may have severe or moderate illness. Physicians could report moderate illness as severe illness and conduct overtreatment. This paper studies how a government could allocate the capacities of hospitals and adjust medical pricing to influence the physician-patient game so that the patients could get more primary care in community hospitals and the physicians could tell the truth. The study indicates that the community hospital competes with class 3-A hospitals via their capacities. Induced demand is restricted by larger community hospitals or smaller class 3-A hospitals. When the price of the treatment for moderate illnesses is low, induced demand occurs with positive probability; when that price is larger than some threshold, induced demand disappears. Raising the difference between the prices of treatments for severe and moderate illnesses could restrict induced demand, but could not eliminate it, nor could this action enhance patients' welfare. In enhancing patients' welfare, community hospitals are better than class 3-A hospitals.