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Rapid increases in the size and costs of the home health market, unknown impacts of Medicare's DRG hospital reimbursement on the posthospital market, and general lack of knowledge about factors that explain interstate variation in home health utilization all suggest the importance of developing and testing models of Medicare home health use. This article proposes and tests a model of state home health utilization as a function of the nursing home market. This model proposes that home health utilization is a function of nursing home bed capacity, of the utilization of nursing home beds by Medicaid patients, of other demand factors, and of supply factors. This model is supported by the data. Specifically, Medicare home health use in the 1978-1984 period was found to be negatively related to nursing home bed stock, positively related to Medicaid nursing home utilization, and related to several other supply and demand factors, as hypothesized by the model. The further model assumption that home health utilization does not affect the nursing home market could not be tested in this analysis, but will be addressed in future research by the authors.