The Omnibus Budget Reconciliation Act of 1987 (OBRA-87) established criteria for Medicare-or Medicaid-certified nursing homes to use in admitting or retaining mentally ill patients. In effect, the law created five dispositional categories for residents or potential residents of nursing homes. Using data from the 1985 National Nursing Home Survey conducted by the National Center for Health Statistics, the authors estimate what proportion of nursing home residents would fall into each of the categories. They suggest that the initial impact of the law will be to shift costs from federal programs to the states. Nursing homes will be expected to provide more mental health services, in the absence of other services, the regulations have a high potent ial for creating homelessness and continuing a pattern of failure to adequately serve patients with serious mental illness.