Nursing home care is growing in importance as the population ages and as Medicare's prospective payment system encourages earlier discharges from acute care settings to nursing homes. Nursing home reimbursement policy is primarily a Medicaid issue, since Medicaid pays for about half the nation's nursing home care. The research reviewed in this article suggests a strong association between case mix and cost, and a weaker but still positive association between quality and cost. The research also implies that traditional nursing home reimbursement methodologies may impede access and may lower quality for Medicaid (and Medicare) recipients. To offset these problems, several states have recently begun to incorporate case mix directly into the reimbursement process. These systems deserve careful policy consideration.