Expenditures in the hospital sector totaled approximately NT$280.4 billion in 1998, representing 3.14% of GDP and nearly two thirds of the National Health Expenditures. These figures attest to the importance of the hospital industry in the overall health care market. In this paper, we use the structure-behavior-performance paradigm of industrial organization analysis to shed light on the trends in development of Taiwan's hospital industry. We conclude that the type of payment system adopted by the government exerts considerable influence on the market structure and nature of competition among hospitals. As opposed to other industries, the most distinct feature of the current hospital industry in Taiwan is that hospitals compete primarily on a nonprice basis. An important area of future research will therefore be to assess the economic impact resulting from the various proposed reforms in Taiwan's payment system.