OBJECTIVES: While premature birth is one of the costliest hospital events, the total direct medical cost of care associated with the birth of a premature infant has not been documented from a societal perspective. METHODS: Retrospective analysis of administrative claims data from a large, employment based IPA covering a total of 3 million members in 1998 was conducted. All infants born in calendar year 1998 with a birth diagnosis of prematurity (<38 weeks gestation) and low birth weight (<2500 grams) [ICD 9-CM codes 765.0x and 765.1x] were identified. Eligible infants were required to be continuously enrolled in the plan during the birth hospitalization, have complete claims histories, and have prescription drug benefits. A secondary analysis of resource utilization during the first 30 days post-initial hospital discharge was conducted among surviving infants who were continuously enrolled during that 30 day period. Costs reflect payments by the plan, patient deductibles, and co-payments for all covered medical services. RESULTS: In 1998, 1,208 births to enrollees were premature and eligible for study; 28% were multiple births. Twenty-one infants (1.7%) died during the birth hospitalization. The total direct medical cost of the birth hospitalization was $35.5 million. During the first 30 days post discharge, 133 (12.4%) of the remaining eligible infants (n=1,076) had claims for inpatient services. Total direct cost of all covered medical services during this period was an additional $1.2 million. CONCLUSION: Even in a relatively low risk population, the direct medical costs associated with premature birth were very high (nearly $37 million for about 1,000 infants) and need for acute medical care continued in the first month post-discharge. Appropriate medical management of this high risk population may be cost-effective.