The hospital industry is now in a major transitional phase which is substantially changing its operational values and organizational forms. This transition was triggered primarily by a crisis brought on by rapidly escalating costs. Many forces centering on the cost containment theme are now forging new political and economic operating rules for health care providers. Collectively these forces are bringing about decisive changes in the quality, quantity and structure of health care delivery systems. The result has been the emergence of a new pattern of hospital organization and administration, described here as the business model hospital. This model is driven by incentives and performance criteria wholly different from those of traditional community hospitals. This research describes this new political economy of health care and identifies, via analysis of field interviews, the crucial issues faced by hospital administrators today and specific actions they are taking to adapt to their new environment. The emergence of the business model hospital has many positive attributes but could have adverse consequences for the broader public interest. Emerging public policy issues are discussed and recommendations are made as to how public policy makers may deal with these issues. These recommendations focus on retaining the major benefits of the business hospital model while preserving useful aspects of the community hospital framework.