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The cost-effective use of long-term care options in a resource-scarce environment depends on targeting services to people who could be cared for most efficiently in specific settings. This study identified subgroups with a high potential for reduced costs of care in different settings by using some measures of physical impairment. The findings indicated that, for elderly people with physical impairment scores below 12 (possible range of 0 to 14), the cost of care was lower with home care than in the nursing home setting. However, for elderly people with physical impairment scores above 12, the cost of care was higher with home care than in a nursing home.