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To determine whether moving clinical medical education out of the tertiary hospital into a community setting compromises academic standards. Cohort study. Flinders University four year graduate entry medical course. In their third year, students are able to choose to study at the tertiary teaching hospital in Adelaide, in rural general practices, or at Royal Darwin Hospital, a regional secondary referral hospital. Participants All 371 medical students who did their year 3 study from 1998-2002. Mean student examination score (%) at the end of year 3. The unadjusted mean year 3 scores at each location differed significantly (P < 0.001); the mean score was 65.2 (SE = 0.43) for Adelaide students, 68.2 (0.83) for Darwin students, and 69.3 (0.97) for students on the rural programme. Mean year 2 scores were similar for each location. Post hoc tests of means adjusted for sex, age, year 2 score, and cohort year showed that the rural and Darwin groups had a significantly improved score in year 3 compared with the Adelaide group (adjusted mean difference = 3.08, 95% confidence interval 1.25 to 4.90, P < 0.001 for rural group; 1.91, 0.47 to 3.36, P = 0.001 for Darwin group). These findings show that the concern that student academic performance in the tertiary hospital would be better than that of students in the regional hospital and community settings is not justified. This challenges the orthodoxy of a tertiary hospital education being the gold standard for undergraduate medical students.