This study examines the determinants of home health use after hospitalization for acute illness for eleven diagnosis-related groups (DRGs) in 1985, drawing on data from four primary sources: Medicare hospital bills, Medicare home health bills, the Medicare and Medicaid Automated Certification System files, and the American Hospital Association Survey. Separate Tobit models are estimated for each DRG. The analysis shows that transfers to home health care are heavily influenced by the hospital's long-term care arrangement and by conditions in local nursing home and home health care markets. Especially important is whether a hospital has its own long-term care unit, swing beds, or both, and whether nursing home beds are available in the local area. Patients discharged from hospitals are more likely to use home health care in areas with a low supply of nursing home beds and low Medicaid reimbursement levels for skilled nursing facilities. The results of this study have implications for proposals to extend Medicare's Prospective Payment System for hospital services to include postacute care. Proponents of a “bundled payment” that encompasses both acute and postacute services argue that the current system leads to inefficiencies and inequities. This analysis points to systematic relationships between home health and nursing home services, which should be factored into the development of a bundled payment policy.