Due to congressional concern that rural hospitals were particularly disadvantaged by Medicare's Prospective Payment System, the U.S. General Accounting Office investigated the role of Medicare and other factors in hospitals' risk of closure. This paper reports on the findings of that study, which compared the risk of closure among urban and rural hospitals during 1985 to 1988, the period after implementation of PPS. When hospital operating and environmental characteristics were held constant, the odds of closure in rural and urban areas differed significantly only for private nonprofit hospitals. Although a number of factors were associated with hospitals' higher risk of closure, we did not find evidence that Medicare was a major factor associated with financial distress or closure during the 1985 to 1988 period.