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An examination of patient data from three medical districts that vary in urban/rural composition and in their proportion of proprietary hospitals was undertaken to determine if high-cost patients whose illnesses place them in "problem" DRGs (diagnosis-related groups identified as "problems" through interviews with private hospital administrators and from information published by the Wisconsin Hospital Association) are being shifted from non-Department of Veterans Affairs (non-VA) hospitals to VA hospitals. Two outcome measures were employed to detect shifting: patient transfers between non-VA and VA hospitals and discharges of veterans in a sample of DRGs identified as unprofitable by private hospitals. A comparison of patient transfers for fiscal year 1982 and fiscal year 1984 (pre- and post-DRG implementation) revealed substantial increases in the number of transfers, but there appeared to be no concentration of transfers in particular DRGs. An examination of discharges for FY 1982 and FY 1984 within 21 problem DRGs showed average increases ranging from 27 percent to 41 percent among patients aged 65 years or older. A comparison of discharges within a sample of 21 randomly selected DRGs showed either no increase or small decreases in discharges from FY 1982 to FY 1984. The possibility is discussed that some of the cost reductions (or slowing of the rise in costs) attributed to the prospective payment system are merely phantom savings. Hospitals may simply be shifting costs from Medicare to the VA system.