Beginning in October 1998, Medicare began to pay acute-care hospital cases in 10 diagnosis-related groups (DRGs) as transfers instead of discharges when the patient is discharged to a targeted post-acute care (PAC) provider after a short inpatient stay. This study examines the behavioral and financial impacts of the initial 10-DRG policy, and projects the likely financial impact of extending the policy to cover additional DRGs or discharges to swing beds. Key findings: 1) Hospitals' discharge behavior did not change significantly in ways that would suggest a strategic response to the PAC transfer payment policy; 2) Based on simulation, less than 5 percent of all cases discharged from the additional DRGs would receive the PAC transfer payment instead of the full DRG payment. Medicare revenue earned by rural hospitals would fall by more than $1,100 for each transfer case.; and 3) Expanding the transfer policy to cover swing beds would result in a relatively small financial impact. A policy brief is also available.