Most public funding methods for long-term care do not adequately match payment rates with patient need for services. Case-mix payment systems are designed to encourage a more efficient and equitable allocation of limited health care resources. Even nursing home case-mix payment systems, however, do not currently provide the proper incentives to match rehabilitation therapy resources to a patient's needs. We were able to determine by a review of over 8,500 patients in 65 nursing homes that certain diagnoses, partial dependence in activities of daily living (ADLs), clear mental status, and improving medical status are associated with the provision of rehabilitation services to nursing home residents. These patient characteristics are clinically reasonable predictors of the need for therapy and should be considered for use in nursing home case-mix reimbursement systems. Primary payment source also was associated with the provision of rehabilitation services even after taking into account significant patient characteristics. It is unclear how much of the variation in service use across payers is due to differences in patient need as opposed to differences in the financial incentives associated with current payment methods.