Objectives: As an innovative technology, internet hospitals have the potential to improve healthcare services. However, the pioneering nature of internet hospitals means that they are still in the early stages of development. This study aimed to investigate the challenges and strategies involved in establishing internet hospitals by public medical institutions in China. Methods: In this study, a qualitative research combined qualitative interview and documentary research was conducted at an internet hospital affiliated with a public tertiary hospital in China. With the documentary collection, interviews were completed with the hospital's decision makers, operators, information technology personnel, clinicians, and pharmacists, as well as the internet hospital's operators, technicians, and external technical partners. Thematic analysis was employed to interpret all the materials collected. Results: Totally 20 participants took part in the interviews. The main challenges in developing internet hospitals include low physician motivation to participate in internet hospital services, low acceptability of internet hospital services among patients, lack of service specifications, and insufficient versatile talents. In the development planning, four phases were established: first, the development of primary services; second, the integration of online and offline services; third, the provision of online prescriptions; and fourth, a focus on differentiation. The service model innovation highlighted four key dimensions, including: (1) the importance of patient and department classification in defining the value proposition; (2) the pivotal role of a high-level coordination department with resource coordination capability in key processes; (3) the significance of independent platform construction and talent cultivation as guarantees of key resources; and (4) the revolutionary profit formula of personalized digital health and patient-centric services. Conclusions: In internet hospitals, primary challenges are evident in physicians’ cognition, patient education, and management skills. Internet hospitals, designed to offer personalized digital health and patient-centric services, necessitate more substantial innovations in service models and clinical care.