We assessed impacts of the Medicare Prospective Payment System (PPS) during its first two years of operation (1984-85) on 467 hospitals using data from the Commission on Professional and Hospital Activities and from the American Hospital Association. Medicare discharges as a per cent of total discharges remained constant between 1983 and 1985, but the per cent of uninsured patients increased, especially at large public hospitals. The number of Medicare and total discharges per hospital declined. The number of complex diagnosis related groups (DRGs) increased, both for Medicare and non-Medicare. This trend began before the implementation of PPS and affected all types of hospitals. There was also an appreciable increase in case mix types of hospitals. There was also an appreciable increase in case mix severity within specific DRGs during 1980-85. The proportion of total patients received from or transferred to other hospitals rose after 1983, but these increases were very small. The per cent of Medicare patients admitted through the emergency room increased, especially after 1983. By contrast, the share of total non-Medicare admissions through the emergency room (ER) remained stable. Although the growth of the number of uninsured and Medicare patients admitted through the ER predate PPS, they may be influenced by it and warrant further monitoring.