This article examines the implications of revenue changes on the financial condition of nonprofit hos pitals. I examine these implications empirically by studying the effect of changes in Medicare payments in the Balanced Budget Act of 1997. Using data from the Healthcare Cost Report Information System maintained by the Centers for Medicare & Medicaid Services between 1996 and 2004, I show that even though revenue fell significantly, resulting in a decline in profitability, hospitals did not significantly change their capital structure and use of capital. An important implication of this is a higher cost of borrowing for these hospitals, which can affect future capital accumulation and viability. Nonprofit hospitals are a very important part of the healthcare delivery system in the United States. Medicare patients constitute the single largest segment of their revenue sources. Understanding the consequences of the changes in Medicare reimbursement on hospital finances is useful in framing future revisions of Medicare payments.