OBJECTIVE: to compare costs of hospitalisation for lower respiratory tract infection (LRTI) in patients who received antibiotics before admission versus those who did not and in patients with and without underlying chronic obstructive airways disease (COAD). METHODS: All hospitalisations were analysed in a population of 350,000 resident in Tayside from 1993-94. Three groups of patients were identified by primary discharge diagnosis in 1993/94 and previous admissions from 1980-1992: 1) acute exacerbation of COAD, 2) LRTI plus a secondary diagnosis of COAD or previous admission with COAD, 3) LRTI but no secondary COAD or previous admission with COAD. Setting specific costs were applied (eg general medicine, intensive care, geriatrics). Dispensed antibiotic prescribing in the 28 days before admission was identified from all community pharmacies. Non-parametric statistical tests were used. RESULTS: Patients with COAD were more likely to have received antibiotics before admission: COAD (n=893) 49%; COAD+LRTI (n=316) 43%; LRTI only (n=822) 33%. Odds ratio for COAD vs LRTI only 1.90 (95% CI 1.56 to 2.31); COAD+LRTI vs LRTI only 1.50 (95% CI 1.15 to 1.96). Patients who received antibiotics before admission had lower hospital costs than patients who did not. Median total costs per admission: COAD £1050 vs £1164 (p=0.5); COAD+LRTI £1067 vs £1354 (p=0.5); LRTI only £1220 vs £1500; (p=0.009). Adjusted for community antibiotic prescribing, patients with LRTI had significantly higher hospital costs than patients with COAD (p=0.001) but not COAD+LRTI (p=0.096). CONCLUSION: Economic models of the potential impact of different community antibiotics on hospital LRTI costs will be subject to case mix bias unless they adjust for community antibiotic use and co-morbidity with COAD.