We conducted a randomized trial in a community rehabilitation hospital to determine the effect of treatment in a geriatric assessment unit on the physical function, institutionalization rate, and mortality of elderly patients. Functionally impaired elderly patients (mean age, 78.8 years) who were recovering from acute medical or surgical illnesses and were considered at risk for nursing home placement were randomly assigned either to the geriatric assessment unit (n = 78) or to a control group that received usual care (n = 77). The two groups were similar at entry and were stratified according to the perceived risk of an immediate nursing home placement. After six months, the patients treated in the geriatric assessment unit had significantly more functional improvement in three of eight basic self-care activities (P less than 0.05). Those in the lower-risk stratum had significantly more improvement in seven of eight self-care activities. Both six weeks and six months after randomization, significantly more patients treated in the geriatric assessment unit than controls (79 vs. 61 percent after six months) were residing in the community. During the year of follow-up, the control patients had more nursing home stays of six months or longer (10 vs. 3; P less than 0.05). However, there was no difference between the groups in the mean number of days spent in health care facilities (acute care hospital, nursing home, or rehabilitation hospital). Survival analysis showed a trend toward fewer deaths among the patients treated in the geriatric assessment unit, and mortality was significantly reduced in the patients considered to be at lower risk of immediate nursing home placement (P less than 0.05). We conclude that the treatment of selected elderly patients in a specialized geriatric rehabilitation unit improves function, decreases the risk of nursing home placement, and may reduce mortality. The beneficial effects on mortality and function appear greatest for patients at a moderate rather than high risk of nursing home placement.