This study investigates functional disability among some of the nation's most vulnerable older adults: rural Medicaid recipients. Data were provided by 221 older adults (mean age = 75.9 years; 82% women) who were receiving community-based long-term care services through Medicaid. Participants self-reported functional ability involving the completion of six basic activities of daily living (BADLs), three cognitive instrumental activities of daily living (IADLS), and four physical IADLs. Self-reports of depressed affect and the number of physical health conditions were also obtained. Path analysis was used to examine all of the associations among age, gender, number of chronic health conditions, depressed affect and functional disability. The tested model was significant [chi2 (DF = 3, n = 221) = 5.052, p = 0.168; TLI = 0.945; CFI = 0.992; RMSEA = 0.056] and explained 45.1% of the variance in BADL disability. Depressed affect significantly predicted disability in cognitive IADLs and physical IADLs, which predicted disability in BADLs. Age and gender had indirect effects on BADL, through their association with cognitive IADLs and physical IADLs. The number of chronic health conditions exerted both indirect and direct effects on BADL disability. Results are discussed within the context of the growing literature that suggests the importance of psychological variables as predictors of functional disability. Moreover, we discuss whether community-based long-term care is appropriate for older adults with high levels of functional disability.