Patients entering long-term care facilities today are more often bedridden and have greater clinical needs than those of the early 1980s. At the same time, functional needs have increased among patients entering traditional nursing homes and home health agencies. The prospective payment system is partly responsible; patients who are more functionally dependent have been diverted from nursing homes with a high population of Medicare patients to traditional nursing homes. Many state Medicaid programs have intensified their preadmission screening and their home-and community-based programs to keep patients who are less functionally dependent out of Medicaid nursing homes. These findings have serious implications. Because of reimbursement limitations, increased costs may result in decreased services and poorer patient care. In addition, a nursing home that reaches its limit may be forced to ration services. This calls for a thorough analysis of long-term care reimbursement and the quality of care [N Engl J Med 1990; 322:21-27].