OBJECTIVES: The primary objectives of this study were to estimate the average costs during the initial phase of care (year of diagnosis) among West Virginia (WV)-Medicare beneficiaries with breast cancer (BC) and compare it with the national estimates from the Surveillance, Epidemiology, End Results (SEER)-Medicare database using a linear decomposition technique.  METHODS: A retrospective observational study was conducted where the study cohorts consisted of elderly women age > 66 with incident BC between 2003 and 2006 in WV-Medicare and SEER-Medicare.  Total costs were the actual medical payments for all services derived from Medicare files.  Generalized linear regressions with log link and gamma distribution were performed.  Blinder-Oaxaca decomposition was conducted to examine the extent to which predisposing, enabling, need-related, healthcare use and external healthcare environmental factors contributed to the differences in the average costs. RESULTS: Total average costs for WV-Medicare cohort during the initial phase of care were lower ($19,875) as compared to the SEER-Medicare cohort ($22,881), a difference of $3,006.  After adjusting for other factors, the difference was $549 and remained significant.  Only 16% of the difference in the average costs between the two cohorts were explained by the independent variables included in the model.  Enabling resources (6.85%), healthcare use (7.53%) explained most of the differences in costs. CONCLUSIONS: Total average costs of BC care were lower in a rural state compared to the national estimates.  The differences in the costs were not explained by the patient-level factors included in the model.