Amidst the growing concern over rapidly rising prices and costs of hospital services, both time series studies of hospital cost increases and cross-section studies of hospital cost and production relationships have been undertaken [for example: 4; 8; 10]. However, such studies have been handicapped by the absence of a generally accepted theory concerning the economic behavior of the hospital.1 The reason for this handicap is rather obvious. In the classic, competitive model of the firm, the concept of profit maximization provides an effective assumption about the behavior of business firms. Most hospitals, however, are not profit-oriented enterprises and therefore the assumption of profit maximization does not shed much light on hospital behavior. In recent years, there have been several attempts to develop a theory of hospital behavior. In his recent paper R. G. Rice [17] proposed a sales maximization model of the hospital.2 J. Newhouse [12], on the other hand, suggests that hospital decisionmakers have both quantity of output and prestige in their maximand. In contrast to these two theories, K. Davis [5] assumes that hospitals maximize short-run net reve-