Background: Cybersecurity incidents are a growing threat to the healthcare industry in general and hospitals in particular. The healthcare industry has lagged behind other industries in protecting its main stakeholder (i.e., patients), and now hospitals must invest considerable capital and effort in protecting their systems. However, this is easier said than done, because hospitals are extraordinarily technology-saturated, complex organizations with high endpoint complexity, internal politics, and regulatory pressures. Objective: The purpose of this study was to develop a systematic and organizational perspective for studying: 1) the dynamics of cybersecurity capability development at hospitals; and 2) how these internal organizational dynamics interact to form a system of hospital cybersecurity in the U.S. Methods: We conducted interviews with hospital CIOs, CISOs, and healthcare cybersecurity experts, analyzed the interview data, and developed a system dynamics model that unravels the mechanisms by which hospitals build cybersecurity capabilities. We then use simulation analysis to examine how changes to variables within the model affect the likelihood of successful cyberattacks across both individual hospitals and a system of hospitals. Results: From the interviews, we discover several key variables that hospitals use to reduce the likelihood of cyber-criminal activity, including internal stakeholder alignment, pressures to improve cybersecurity capabilities, and endpoint complexity. Our simulation results show that the variable with the most dramatic impact on reducing cyber-attack at hospitals is endpoint complexity, followed by internal stakeholder alignment. While resource availability was important in fueling efforts to close cybersecurity capability gaps, low levels of resources could be compensated against by setting a high target level of cybersecurity. Furthermore, high variabilities in resource availability and endpoint complexity across a system of hospitals made the whole system more vulnerable to cyber-attacks. Conclusions: In order to enhance cybersecurity capabilities at hospitals, the main focus of CIOs and CISOs should be on reducing endpoint complexity and improving internal stakeholder alignment. In a large system of hospitals, if variabilities in endpoint complexity and resource availability are reduced, then the whole system is made less vulnerable. This provides some support to decisions made by smaller hospitals to outsource information security functions to larger organizations, and suggests that policies should raise the target floor of capabilities to a point that reduces the variability across the entire healthcare system. This study assists health care leaders to better understand the range of outcomes resulting from strategic decisions of cybersecurity capability development, so that they can better reduce the vulnerabilities that hospitals have today.