OBJECTIVE: Healthcare utilization during the last year of life has traditionally comprised 27% to 31% of the total Medicare budget, but knowledge of factors affecting terminal costs is limited. We examined the effects of age, gender, ethnicity, and chronic illness on medical costs in the last year of life. METHODS: This was a retrospective cohort analysis of longitudinal utilization data in a regional health maintenance organization (HMO). Study subjects were HMO members (2312) who died between January 1, 1996 and December 31, 1998. Healthcare utilization during the 12 months prior to death was captured from administrative claims and matched to cause of death on the death certificate. We also determined chronic illnesses present using claims data and compared this to cause of death on the death certificate. RESULTS: Mean total cost in the last year of life was $37,736 (+$21,692), with two-thirds of the costs attributed to inpatient care ($23,321 +$8,748) per patient). Costs varied widely by age at time of death, with mean total costs highest among persons age 65 to 70. Costs fell rapidly after age 70. Total costs increased linearly with the number of chronic illnesses, which varied significantly with age. Patients with renal failure and complicated diabetes had terminal costs substantially higher than did patients with most other chronic illnesses; costs for patients who died with chronic dementia were lower than average. Sex and ethnicity were not significant factors after adjustment for age. Cost analyses based on the cause of death on death certificates underestimated the impact of several major illnesses. CONCLUSIONS: Healthcare costs at the end of life vary widely by age and the number and type of chronic illnesses in the year prior to death. Cause of death listed on death certificates does not accurately reflect the impact of chronic illness on terminal costs.