Objective To compare the probability of experiencing a potentially preventable hospitalization (PPH) between older dual eligible Medicaid home and community‐based service (HCBS) users and nursing home residents. Data Sources Three years of Medicaid and Medicare claims data (2003–2005) from seven states, linked to area characteristics from the Area Resource File. Study Design A primary diagnosis of an ambulatory care sensitive condition on the inpatient hospital claim was used to identify PPHs. We used inverse probability of treatment weighting to mitigate the potential selection of HCBS versus nursing home use. Principal Findings The most frequent conditions accounting for PPHs were the same among the HCBS users and nursing home residents and included congestive heart failure, pneumonia, chronic obstructive pulmonary disease, urinary tract infection, and dehydration. Compared to nursing home residents, elderly HCBS users had an increased probability of experiencing both a PPH and a non‐PPH. Conclusions HCBS users’ increased probability for potentially and non‐PPHs suggests a need for more proactive integration of medical and long‐term care.