This study used Taiwan's National Health Insurance claim database (years 2000-2005) to examine how thiazolidinediones (TZD), a new class of drugs for diabetes, penetrated into Taiwan's hospitals, and its association with the concentration of all diabetes drugs at the hospital level. We collected 72 monthly summaries of diabetes prescriptions from all hospitals in Taiwan. Hospital-level pharmaceutical concentration was measured by penetration of TZD, defined as monthly market share of TZD in each hospital. Concentration of diabetes drugs was measured by Herfindahl-Hirschman indices. We found a negative association (coefficient = -0.3610) between TZD penetration and concentration of diabetes drug but a positive association between penetration of TZD and the volume of prescribed diabetes drugs (coefficient = 0.4088). In conclusion, hospital characteristics and volume of services determined the concentration of pharmaceuticals at the institution level, reflecting the heterogeneous competition between pharmaceutical companies within each hospital. Institution-level pharmaceutical concentration influences the adoption and penetration of new drugs.