change in the quality of care is primarily due to the increased demand caused by the growth of private and public insurance. The paper presents an analytic model of the hospital industry in which quality affects the demand for hospital services and in which the purchase of private insurance is endogenous. Estimates of key equations of the model based on a cross-section of time series for the individual states for the years 1958 through 1973 are presented. The price adjustment process and dynamic multipliers are discussed. THE COST OF A DAY of hospital care in the United States has increased 600 per cent in the past twenty years, an annual rate of more than 9 per cent. During the