To assess the impact of Medicare's prospective payment system (PPS) on patient care and outcome from the medical intensive care unit (MICU), we reviewed the medical records of 400 MICU patients from three community hospitals: 200 patients were admitted before the PPS and 200 were admitted after the PPS. We sampled Medicare patients, aged 65 years and over, and non-Medicare comparison patients, aged 50 to 64 years, collecting data on case mix, treatment intensity and discharge disposition, hospital and six-month mortality, length of stay, and number of intensive care unit beds. After the PPS, the number of intensive care unit beds decreased 31%, without changes in MICU patients' illness severity or treatment intensity. Hospital length of stay decreased 15% in the Medicare group and 43% in the comparison group. For both Medicare and comparison patients combined, MICU length of stay decreased 14% and patients after the PPS were less likely to be discharged to go home. There were no significant changes in in-hospital or six-month mortality. Thus, clinically meaningful decreases in length of stay among seriously ill patients did not result in a change in in-hospital or six-month mortality.