Background. In Oregon, adult foster care (AFC) homes, which are private residences where a live-in manager cares for one to five disabled residents, have been covered by Medicaid since 1981 and seem to offer a mainstream alternative to nursing homes. They house almost 6000 older people, two thirds of which pay privately. Methods. In a cross-sectional study, we interviewed 400 AFC and 400 nursing home residents. Data analyses included descriptive cross-tabulations; hierarchical loglinear models for judging the effects of care setting and payment status on resident characteristics; and logit analyses for predicting care setting and payment status within care settings. Results. On average, nursing home residents were more physically and cognitively impaired than AFC residents, but there was considerable overlap in patterns of frailty in the two settings. Medicaid AFC residents were less disabled than privately paying AFC residents. AFC residents reported more social activity, even when we controlled for disability status. AFC residents and their families were more likely to value privacy and homelike settings when choosing a care setting, whereas nursing home residents were more likely to value rehabilitation and organized activity programs. Conclusions. Both AFC and nursing homes are viable components of a long-term care repertoire. The greater disability levels of private-pay AFC residents refutes the criticisms that disabled Medicaid residents were being inappropriately channeled to AFC.