In 1981 eight small- and medium-sized hospitals in a rural area of New York State began voluntary participation in the Finger Lakes Hospital Experimental Payment (FLHEP) program. An annual maximum reimbursement formula was set for each hospital, which offered financial incentives to contain the growth in expenditures without penalty in subsequent years. In this analysis of the first three years of the program, we found that the growth in revenues and expenses in study group hospitals was reduced and chronic deficits were eliminated. The FLHEP model may have wider potential for ensuring solvency while controlling expenditures of hospitals in other rural areas of the United States.