We measured quality of care before and after implementation of the prospective payment system. We developed a structured implicit review form and applied it to a sample of 1366 Medicare patients with congestive heart failure, acute myocardial infarction, pneumonia, cerebrovascular accident, or hip fracture who were hospitalized in 1981-1982 or 1985-1986. Very poor quality of care was associated with increased death rates 30 days after admission (17% with very good care died vs 30% with very poor care). The quality of medical care improved between 1981-1982 and 1985-1986 (from 25% receiving poor or very poor care to 12%), although more patients were judged to have been discharged too soon and in unstable condition (7% vs 4%). Except for discharge planning processes, the quality of hospital care has continued to improve for Medicare patients despite, or because of, the introduction of the prospective payment system with its accompanying professional review organization review.