OBJECTIVE: To analyze the effect of states' Medicaid bed-hold policies on the 30-day rehospitalization of Medicare postacute skilled nursing facility (SNF) residents. DATA SOURCES: Minimum data set assessments were merged with Medicare claims and eligibility files for all first-time SNF admissions (N = 3,322,088) over the period 2000 through 2005; states' Medicaid bed-hold policies were obtained via survey. STUDY DESIGN: Regression specification incorporating facility fixed effects to examine changes in Medicaid bed-hold policies on the likelihood of a 30-day SNF rehospitalization. PRINCIPAL FINDINGS: Using a continuous measure of bed-hold generosity, state Medicaid bed-hold was positively related to Medicare SNF rehospitalization. Specifically, the introduction of a bed-hold policy with average generosity increases Medicare rehospitalizations by 1.8 percent, representing roughly 12,000 SNF rehospitalizations at a cost to Medicare of approximately U.S.$100 million over our study period. CONCLUSIONS: Although facilities do not receive a Medicaid bed-hold payment for Medicare SNF stays, we found that the adoption of more generous policies led to greater SNF rehospitalizations. This type of spillover is largely ignored in current discussions of Medicare payment reforms such as bundled payment. Neither Medicare nor Medicaid has an incentive to internalize the risks and benefits of its actions as they affect the other.