We tested the hypothesis that since the implementation of the prospective payment system (PPS), elderly patients hospitalized for hip fractures receive shorter, less care-intensive hospitalizations and are more frequently institutionalized. In blinded fashion, we reviewed the charts of elderly patients with hip fractures admitted to a municipal hospital from 1981 through 1985. Demographic and clinical characteristics of patients treated before implementation of the PPS were similar to patients treated thereafter. After implementation of the PPS, the mean length of hospitalization fell from 16.6 to 10.3 days, and the mean number of physical therapy sessions received decreased from 9.7 to 4.9. Concomitantly, the proportion of patients discharged to a nursing home increased (21% to 48%), as did the proportion receiving nursing home care at six months after discharge (13% to 39%). This increase in long-term nursing home placement suggests that the quality of care for elderly patients with hip fractures may have deteriorated.