Background: Internet hospitals have been encouraged by the Chinese government to develop an innovative medical service model that mainly uses new internet-based technologies to increase access to health care and improve the quality and efficiency of health care delivery. However, the academic exploration of the institutional and sectoral development of internet hospitals in China is scarce in the existing literature. Objective: This study aimed to investigate the policy interventions, development trends, and service innovations of internet hospitals in China. It is expected that the findings from this study will contribute to the further innovation of internet hospitals in China and provide references for the international development of internet hospitals for personalized digital health and patient-centric services. Methods: This study analyzed official policies related to internet hospitals that were implemented by the government in China since 2005. The data of formally approved internet hospitals were collected from official websites to analyze development trends. In-depth semistructured interviews were conducted with 58 key stakeholders who represented comprehensive viewpoints about the service innovations of internet hospitals between March and November 2019. Results: In total, 25 policies that promoted the development of internet hospitals in China were identified. These policies encompassed informatization infrastructure construction, medical resource integration, development model design, service model design, and payment model design. Of the 268 internet hospitals that had received an official license from the government, 153 public internet hospitals had been built mainly by medical institutions. Public tertiary hospitals were the main actors in founding internet hospitals that were created to provide services that targeted patients with common diseases or chronic diseases or patients living in remote and rural areas. Promoting convenient access to high-quality medical resources and saving patients' and their families' time were the key values of internet hospitals. Conclusions: The policy interventions strongly promoted the development of internet hospitals in China. Public tertiary hospitals led the development of internet hospitals. However, internet hospitals in China have mainly played roles that are complementary to those of physical medical institutions. The service model of internet hospitals needs more distinguished innovations to provide personalized digital health and patient-centric services.