OBJECTIVES:  To identify factors that predict adherence to topical medication in pediatric population with atopic dermatitis (AD), and assess their impact on healthcare expenditures. METHODS: AD patient’s age under 12 years old using topic corticosteroid or topical calcineurin inhibitor (TCI) was identified using MarketScanTM Medicaid database from 2005 to 2007. Adherence to AD medication and costs for all healthcare claims and costs for AD related claims were outcomes of interest and measured over 12 months when AD medication started. Medication adherence was measured using medication possession ratio. Multiple regression analysis was carried to examine predictors for medication adherence and their predictions on healthcare costs. RESULTS: 4,182 patients were included, with a mean age of 4 years. Adherence to AD medication average was low (41%), with the lowest rates in patients with low potency corticosteroid therapy alone including alclometasone, desonide or hydrocortisone (39%) and the highest rates in those who used combination therapy (topical corticosteroid and TCI) (68%). Type of health plan, Medicaid eligibility status, number of therapeutic class, comorbidity, hospitalization or not and AD related costs during 12 months before AD medication started were significantly associated with AD medication adherence. Adherence to AD medication was significantly negatively associated with total annual healthcare costs (p<0.001) and with AD related costs (p<0.001), adjusted for patient demographic, comorbidity, and healthcare utilization characteristics before AD medication started. CONCLUSIONS: Poor adherence to topical medication was observed in pediatric AD, and adherence rates differed by the type and combination of AD medication therapy. The detrimental effect of poor adherence on healthcare economic outcome was significant, which implies a need to improve adherence in order to reduce the financial impact of non-adherence. Factors which could contribute non-adherence and financial burden need to be refined and targeted by intervention to improve humanistic and economic outcomes of treatment.