In 1996 the FDA approved donepezil for treatment of Alzheimer s patients with symptoms of memory and cognitive loss. A recent study projected that the cost of donepezil could be offset by reduced utilization over a two year period. OBJECTIVES: The purpose of this study was to measure use of donepezil among Veterans Health Administration (VHA) patients during FY 98 and the impact on cost. METHODS: Patients diagnosed with Alzheimer's disease in five VHA medical centers were identified and costs for inpatient and outpatient care were calculated based on Medicare reimbursement rates. Extended care costs were calculated at $236 per day (VHA national per diem). Prescription costs were calculated using VHA Pharmacy Benefit Management prices. Patients with medical contraindications, those who died during the study period, and those admitted to an extended care facility prior to the beginning of the fiscal year, were excluded from the analysis. Regression analysis was used to measure the association between donepezil use and cost while controlling for severity, comorbidity, previous hospitalizations, and site. RESULTS: Donepezil was used by 11% (167) of patients with no contraindications (N=1484). The regression analyses indicated donepezil users had higher pharmaceutical (+$800, p=.0001) and outpatient costs (+$801, p=.006), but lower inpatient (acute plus extended care) costs (-$1542, p=.10). The was no substantial difference in total cost (+$58, p=.95). CONCLUSION: The results support the hypothesis that higher pharmaceutical and outpatients costs related to donepezil use are offset by lower inpatient costs. The extent of the offset may be greater for the VHA (due to substantial discounts with drug manufacturers), than would be found in other health care systems.