To determine whether a community-wide experiment in hospital prospective payment adversely affected quality of care, availability and outcomes of care were studied in Rochester, NY from 1980 to 1984. During this 5-year period, prospective payment contained hospital expenditures in a community that was already below the national average in health-care costs. Access to necessary care was maintained, and there were increased admissions for management of maternal illness and acute myocardial infarction. Rates of inpatient elective surgery declined. Outcomes of care remained stable, including neonatal deaths, ischemic heart disease deaths, deaths from five selected surgical conditions, and rates of adverse outcomes from sentinel medical and surgical conditions. These results indicated that prospective payment programs in which incentives to decrease marginal or unneeded care are linked with a community-wide effort to plan for the delivery of services can be financially and clinically successful.