Purpose: Hospitalization of nursing home residents is costly and associated with adverse outcomes. The economic tradeoffs of policies and nursing home organizational processes that reduce hospitalizations are unclear, in part because Medicaid most commonly pays for nursing home care, and Medicare pays for most hospitalizations. We sought to clarify these tradeoffs by comparing the per-bed difference in annual Medicaid and Medicare expenditures of two state policies and three nursing home organizational processes associated with hospitalization of nursing home residents. Methods: We developed a Markov model to specifically compare a $10 / day increase in the Medicaid rate, a 10-day full payment bed-hold policy, employment of a nurse practitioner or physician's assistant (NP/PA), and an increase in the ratio of registered nurses (RN) to all nurses from 0.33 to 0.5 to a nursing home without such policies or practices. We included costs of nursing home care, outpatient utilization including ER visits, hospitalization and skilled nursing care and modeled the effect of each intervention on costs of each type. We assessed the robustness of our findings with probabilistic sensitivity analysis Results: In 5,000 Monte Carlo simulations average annual Medicaid expenditures for the baseline facility were $34,880 (2.5-97.5 percentiles: $26,150-$45,440), and Medicare expenditures were $7,570 ($1,480-$25,980). All modeled interventions increased annual Medicaid costs: Medicaid payment rate by an average of $3,580 ($3,510-$3,640), an increase in the RN ratio by $240 ($60-$580), NP/PA employment and special care unit each by $40 ($10-$120) and bed-hold policy by $200 (-$380-$600). Compared to the baseline nursing home, factors that reduced the hospitalization rate saved Medicare money: Medicaid payment rate -$530 (-$2,000--$80), increased RN ratio -$1,360 (-$5,200--$80) NP/PA employment -$190 (-$950-$240) and special care unit -$280 (-$1,090--$30). For three interventions, increased RN ratio, NP/PA employment and special care unit, Medicare savings more than offset the Medicaid cost. Bed-hold policy, because it increased hospitalizations, increased Medicare expenditures $2,200 ($190-$8,370). Conclusions: Medicare reaps the financial rewards of reduced hospitalizations, whereas the cost of such interventions is borne by Medicaid. Hospitalization based pay for performance initiatives should assure alignment of financial incentives between States and the Federal government. Further study should both validate these results and determine the effect of the assessed practices and policy on quality of life for residents and families.