The authors' objective is to determine the effect of diagnosed Alzheimer disease (AD) on cost to Medicare of treating other diseases. Using the 1994 National Long-Term Care Survey merged with Medicare claims and death data, the authors assessed the relative cost to Medicare of covering beneficiaries over 1994-1995 with diagnosed AD relative to other elderly population. They focused on hospitalizations during 1994-1995 for hip fracture, stroke, coronary heart disease, congestive heart failure, and pneumonia. The authors determined whether differences in Medicare payments by AD status mainly reflected differences in rates of occurrence of hospitalizations for the five primary diagnoses, other primary diagnoses, or death during 1994-1995 or in spending given the adverse events. During 1994-1995, an average of $15,700 was spent by Medicare, per person, for those with diagnosed AD, nearly twice the amount spent on others. The difference in Medicare payments was attributable to more adverse events occurring to AD group. Such persons had higher death rates than other elderly population (odds ratio [OR], 1.32; 95% confidence interval [CI], 1.07-1.62), higher hospitalization rates for hip fracture (OR, 1.96; 95% CI, 1.34-2.87), stroke (OR, 1.71; 95% CI, 1.10-2.68), pneumonia (OR, 1.46; 95% CI, 1.07-1.99), and for other reasons than the five conditions (OR, 1.65; 95% CI, 1.38-1.98), but they also had lower hospitalization rates for the cardiac diseases. There were no differences in Medicare payments according to AD diagnosis, controlling for frequency of deaths, hospitalizations, and other factors. Persons with diagnosed AD cost Medicare more because of more adverse health events rather than in intensity of care, given event occurrence.