The Balanced Budget Act of 1997 (BBA) established new reimbursement systems in the Medicare home health fee-for-service benefit. Reimbursements were reduced to 1993 levels and per-beneficiary capitated limits were introduced for the first time. This article analyzes the impact of these changes on chronically ill older adults and their families. The study combined a secondary analysis of the Provider of Service file (1996, 1999, 2002, and the Medicare Current Beneficiary Survey (1996, 1998) with qualitative interviews of home health agency directors. The greatest decreases in staff and visits were for medical social work and home health aide services. Patients with caregivers saw greater decreases in visits and reimbursements for all visits, skilled nursing, medical social work, and home health aide visits. Agency directors reported that they increased caregiver education, training, and involvement in care in order to discharge patients sooner. Additional research is needed to understand the long-term, adverse impact of these policy changes on chronically ill patients and their families. (Contains 5 tables.)