We reviewed age-specific national mortality data for the years 1981 through 1985 to evaluate changes in the location of death among the nation's elderly after implementation of Medicare's prospective payment system (PPS). Although it was unchanged in 1981 and 1982, the percentage of deaths occurring in the nation's nursing homes increased from 18.9 percent in 1982 to 21.5 percent in 1985. The increases in nursing home deaths were greatest between 1983 and 1984, when 33 states showed larger-than-expected increases when compared with a base period before implementation of PPS. These changes were accompanied by a decline in the percentage of deaths that occurred in hospitals. These changes in the location of death were most pronounced in the Midwest, South, and West; they were very small in the Northeast and in states not affected by the PPS. Furthermore, the states with high population enrollments in health maintenance organizations and with large declines in the mean hospital length of stay in 1984 showed the greatest shifts in the location of death. We conclude that Medicare's PPS resulted in the increased transfer of terminally ill patients from hospitals to nursing homes. Further study is required to determine whether such transfer is medically appropriate.