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CONTEXT: Previous studies examining differences in the quality of care between capitated and fee-for-service payment systems have focused on the care delivered in a single setting. No study to date has compared outcomes over an entire episode of care delivered across multiple settings. OBJECTIVE: To compare outcomes of care for patients receiving institutional rehabilitation for hip fracture in fee-for-service and group/staff HMO delivery systems. DESIGN: One-year prospective inception cohort. SETTING: Six hospital-based, integrated care systems paid on a traditional fee-for-service model and five group/staff HMOs (paid fixed capitation rate by Medicare). The 11 delivery systems were selected because of their commitment to geriatric rehabilitation. PATIENTS: 196 fee-for-service and 140 group/staff HMO patients with acute hip fracture were identified on admission to inpatient rehabilitation. MEASURES: Four primary outcomes--recovery of activities of daily living, improvement in ambulation, return to community living, and mortality--were measured at 3, 6, 9, and 12 months. Service utilization was assessed in the acute-care hospital setting, rehabilitation setting, and at each 3-month follow-up interval. Risk adjustment was performed by using multiple and logistic regression. RESULTS: Overall, no differences were found between patients in group/staff HMOs and fee-for-service patients. Group/staff HMO patients experienced improved functional recovery at 6 months (P < 0.01) and improved ambulation at 12 months (P = 0.05) compared with fee-for-service patients, although these were isolated findings. With regard to utilization, group/staff HMO delivery systems used physician services less intensively and substituted less-skilled allied health personnel. CONCLUSION: Compared with fee-for-service delivery systems, with a similar commitment to excellence in geriatric rehabilitation, group/staff HMOs can achieve equivalent outcomes in older patients recovering from hip fracture with less-intense service utilization.