Simulates the financial impact of the outpatient prospective payment system rates and estimates the number and type of rural hospitals in the five states likely to become financially distressed as a result of its implementation. Results clearly suggest that the outpatient PPS will have a significant negative impact on the profitability and cash position of many rural hospitals, especially those that are small, government owned, and classified as Medicare dependent. The results also suggest that this negative impact may lead to a significant increase in the number of financially distressed rural hospitals. Given these findings, a permanent exemption to outpatient prospective payment to small hospitals may be a policy alternative that would benefit rural communities and cost the Medicare program relatively little. Report available on request by contacting the Center.