Hospitals compose a large share of total health spending in most countries, and thus have been the target of reforms to improve efficiency and reduce costs. In China, the government implemented national health care reform to improve access to essential services and reduce high out-of-pocket medical spending. A key component is the comprehensive reform of public hospitals on a pilot basis, although it remains one of the least understood aspects of health care reform in China. This article outlines the main goals of the reform of public hospitals in China, progress to date and the direction of reform between now and 2015. Then, we review experiences from industrialized countries and discuss the applicability to the Chinese reform process. Based on the policy directions focusing on efficiency and quality, and reflecting on how hospital systems in other countries have responded, the article concludes that the hospital of the future in China operates at county level. Barriers to realizing this are discussed.