Theme Hospital is a level-based hospital management simulation where players have to start on an empty building, and then assemble rooms with all kinds of material, from desks and file cabinets for the general diagnosis to the expensive ultra-scanners and x-rays to diagnose such bizarre diseases such as Bloaty Head, Slack Songue or Alien DNA, and treat them with even more bizarre machines like an Head Inflator or a DNA fixer. There several additional rooms, such as a staff room for your employees to rest, a toilet so that patients don't have to relieve themselves in the corridors, a research department to get the most advanced diagnostic and treatment technologies and a training room where consultants can teach a thing or two to rookies, making them capable doctors. The size and layout of each room can be set by the player, according to the available space. In addition to rooms, the player must provide radiators, seating for patients and drink machines.

However, rooms don't run by themselves. Most diagnostic and clinics can work with regular doctors, but others like the operating theater and the research room require specialized staff while the ward, pharmacy and the fracture clinic require an attending nurse. At the same time, the hospital can't run without handymen cruising around the hospital to water up dry plants, clean up litter and vomit (after all, people go there because they are sick) and fix machines, while receptionists direct patients to the proper rooms.

As levels advance, the player faces increasingly harder situations: VIP visits, emergencies, epidemics and earthquakes, which can either take a toll on reputation or on the bank account. On the other hand, as more and more equipment is required, additional plots of land are available for purchase in later maps.