A retrospective audit of patients' utilization of inpatient psychiatric care at a Department of Veterans Affairs medical center before and after implementation of a prospective payment system compared patterns of utilization by chronic and nonchronic patients. It also examined changes over time in the size of the two groups, total number of bed days used, mean number of admissions, mean length of stay, and mean cumulative two-year length of stay. Four years after implementation of the prospective payment system, chronic patients constituted 3 percent of the patient population but used 15.2 percent of all bed days. Both chronic and nonchronic patients bad a similar decrease in mean length of stay over the period, but chronic patients' mean number of admissions rose by more than 7O percent. The mean cumulative two-year length of stay of chronic patients remained stable over the period while that of the nonchronic patients decreased by 33.2 percent.