As part of an effort to understand better the "natural history" of episodes of care among Medicare beneficiaries, this report documents patterns of postacute care use by Medicare patients and explores some factors that may explain these patterns. The research suggests that there are factors unrelated to a patient's medical condition that determine the setting in which postacute care is given. These factors include economic and social circumstances, and characteristics of the discharging hospital. Specifically, whites are significantly more likely to use skilled nursing facility (SNF) care than nonwhites, whereas nonwhites are significantly more likely to use home health care than whites. A similar pattern is repeated at the hospital level: Patients discharged from hospitals with a "disproportionate share" of Medicaid patients are less likely to receive SNF care but more likely to use home health care than are patients discharged from other hospitals. Because SNF and home health care appear to be substitutes for each other, policy measures that affect care in one of these settings will probably affect care in the other.