A randomized design was used to examine the cost-effectiveness of a Veterans Administration hospital-based home care program that case managed inpatient and outpatient care. Patients (N = 419) with two or more functional impairments or a terminal illness were randomized to hospital-based home care (n = 211) or customary care (n = 208). Functional status, satisfaction with care, and morale were measured at baseline and at 1 and 6 months after discharge from the hospital; health care utilization was tracked for 6 months. Findings included significantly higher (0.1 on a three-point scale) patient and caregiver satisfaction with care at 1 month and lower Veterans Administration and private sector hospital costs ($3000 vs $4245) for the experimental group. Net per person health care costs were also 13% lower in the experimental group. We conclude that this model of hospital-based home care is cost-effective and that its expansion to cover these two patient groups throughout the Veterans Administration system can improve patient care at no additional cost.