Objective To determine whether the observed differences in the risk‐adjusted rehospitalization rates across skilled nursing facilities (SNFs) reflect true differences or merely differences in patient severity. Settings Elderly Medicare beneficiaries newly admitted to an SNF following hospitalization. Study Design We used 2009–2012 Medicare data to calculate SNFs' risk‐adjusted rehospitalization rate. We then estimated the effect of these rehospitalization rates on the rehospitalization of incident patients in 2013, using an instrumental variable (IV) method and controlling for patient's demographic and clinical characteristics and residential zip code fixed effects. We used the number of empty beds in a patient's proximate SNFs during hospital discharge to create the IV. Principal Findings The risk‐adjusted rehospitalization rate varies widely; about one‐quarter of the SNFs have a rehospitalization rate lower than 17 percent, and for one‐quarter, it is higher than 23 percent. All the IV models result in a robust finding that an increase in a SNF's rehospitalization rate of 1 percentage point over the period 2009–2012 leads to an increase in a patient's likelihood of rehospitalization by 0.8 percentage points in 2013. Conclusions Treatment in SNFs with historically low rehospitalization causally reduces a patient's likelihood of rehospitalization. Observed differences in rehospitalization rates reflect true differences and are not an artifact of selection.