Of the key federal programs that finance in-home services to the elderly, the Medicare program represents the largest and fastest growing. Although Medicare is a federal program, utilization and expenditures for home care vary widely across the states. Building on the work of Feldstein, Scanlon, and others, theory and data are presented that attempt to illuminate reasons why such variations exist. Using program data by state for 1982, nearly three fourths of the variation in home health utilization (R2= 0.72) is explained by seven state characteristics. About three fifths of the variation in expenditures (R2= 0.61) is accounted for by six state factors. Of most explanatory importance are home health agency (HHA) supply, need levels, presence of alternative sources of care, sources of referrals, and state resources. The results suggest the need to give more analytic attention to the impact of the market share of proprietary HHAs in explaining expenditure variations and the effects of total supply on utilization and spending.