OBJECTIVES: Analysis was conducted to estimate annual direct medical costs for community dwelling persons with dementia and to determine the proportion of costs in various categories paid by various payers. METHODS: Retrospective analysis was conducted of the 2001 Medical Expenditure Panel Survey. The survey provided data from a sample of 33,556 respondents and is representative of the civilian non-institutionalized population of the United States. Dementia patients were identified using ICD-9-CM codes. For each patient with dementia, one patient without dementia was randomly selected matched on age, gender, race, and number of medical conditions. Medical care costs for each service component were calculated and compared. The proportion of medical care costs paid by each payer was calculated for dementia patients. Sample estimates were projected to the population and standard errors were calculated using the Taylor expansion method. RESULTS: In 2001, the mean total health care expenditure per patient with dementia was $12,310, while the mean total expenditure for a matched patient without dementia was $7,300. Among dementia patients, the highest proportion of costs were for inpatient hospital stays at $4709 (SE=$727), followed by home health care at $3703 ($450). Patients with dementia had a significantly higher mean number of home health provider days at 74.6 days (10.5), compared to patients without dementia, 3.8 days (1.0). The major sources of payments for health care expenditures of dementia patients were Medicare (38.3%) and out-of-pocket payments (32.6%). Approximately 62% of prescription drug expenditures among dementia patients were paid out-of-pocket. Incremental costs per patient with dementia were $5010, or a total cost of $8.3 billion attributable to dementia in community dwelling patients. CONCLUSIONS: Community dwelling dementia patients cost approximately 1.7 times more than similar patients without dementia. A high proportion of total expenditures, especially prescription drug expenditures among dementia patients were paid out-of-pocket.