OBJECTIVES: In 2011, PhilHealth, the Philippine national health insurance provider, switched to a case rate scheme in tandem with a policy which prevents government hospitals from charging patients in situations where that total admission cost exceeds the case rate. These policies aim to provide financial protection to patients while promoting efficiency in hospitals. There are concerns that tertiary government hospitals might end losing money as they managed mostly complicated cases. To assess this possibility, the cost of admission for pneumonia cases admitted in the internal medicine ward of a tertiary government hospital in the Philippines was estimated. The proportion of pneumonia admissions where costs did not exceed case rates was also determined. METHODS: A random sample of admissions for pneumonia for two severity classes (moderate-risk and high-risk) from January 1 to June 30 2013 was obtained. Costs considered were diagnostic tests, medications, mechanical ventilator use and overhead costs. Due to the lack of billing reports, costs of diagnostics tests and medications were computed via tallies from chart review. Overhead costs were estimated using WHO-CHOICE 2007 values for the Philippines. RESULTS: A sample of 112 moderate-risk and 42 high-risk pneumonia cases were included in the study. The mean total costs were US$ 564.55 for moderate-risk and US$ 727.01 for high-risk. 29.5% of moderate-risk cases had a total cost less than the case rate of US$ 333 and 68.2% of high-risk cases had a total cost less than the case rate of US$ 711.11. Considering costs and reimbursements for all admissions, the hospital will lose US$ 25,895.11 due to moderate-risk and US$ 2,121.77 due to high-risk admissions. CONCLUSIONS: Estimated mean total costs exceed the case rates of PhilHealth for pneumonia. The case rates may not be adequate to cover the total costs of admission in a government tertiary hospital in the Philippines.