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Case-mix differences between 653 home health care patients and 650 nursing home patients, and between 455 Medicare home health patients and 447 Medicare nursing home patients were assessed using random samples selected from 20 home health agencies and 46 nursing homes in 12 states in 1982 and 1983. Home health patients were younger, had shorter lengths of stay, and were less functionally disabled than nursing home patients. Traditional long-term care problems requiring personal care were more common among nursing home patients, whereas problems requiring skilled nursing services were more prevalent among home health patients. Considering Medicare patients only, nursing home patients were much more likely to be dependent in activities of daily living (ADLs) than home health patients. Medicare nursing home and home health patients were relatively similar in terms of long-term care problems, and differences in medical problems were less pronounced than between all nursing home and all home health patients. From the standpoint of cost-effectiveness, it would appear that home health care might provide a substitute for acute care hospital use at the end of a hospital stay, and appears to be a more viable option in the care of patients who are not severely disabled and do not have profound functional problems. The Medicare skilled nursing facility, however, is likely to continue to have a crucial role in posthospital care as the treatment modality of choice for individuals who require both highly skilled care and functional assistance.