Thanks to continued economic growth and increasing income, the overall poverty rate has been on the decline in China. However, due to escalating medical costs and lack of insurance coverage, medical spending often causes financial hardship for many rural families. Using data from the 1998 China National Health Services Survey, the impact of medical expenditure on the poverty headcount for different rural regions was estimated. Based on the reported statistics on income alone, 7.22% of the whole rural sample was below the poverty line. Out-of-pocket medical spending raised this by more than 3 percentage points. In other words, medical spending raised the number of rural households living below the poverty line by 44.3%. Medical expenditure has become an important source of transient poverty in rural China.