Using data from a longitudinal survey of caregivers of Alzheimer's disease patients, we calculated the average per-patient direct medical costs over a 6-month period for a matched sample of patients (N = 376). A group of patients receiving donepezil for 6 months was compared with a group not receiving this form of drug therapy. The groups were matched by disease severity, age, sex, and comorbidity. The average age in the two groups was 74 years, with 50% female and 90% white. Patients in both groups had a mean of 1.6 comorbid conditions. No patients in either group were institutionalized at the beginning of the 6-month period, and all patients were taking at least one prescription drug, including donepezil. Mean 6-month direct medical expenses for a patient receiving donepezil were $3443, including the cost of the drug, whereas the per-patient mean expenses for the comparison group were $3476. Although the patients receiving donepezil had greater expenditures for prescription drugs, these costs were offset by a slower rate of institutionalization. At the end of the 6-month period, 5% of donepezil patients were institutionalized, compared with 10% of the nondonepezil patients. The cost of receiving donepezil treatment for 6 months did not result in a significantly higher per-patient mean direct cost.