Background: It is uncertain, under prospective payment, if hospitals face financial disincentives to treat older Medicare patients. Therefore, we studied associations between age and hospital charges and length of stay for Medicare patients and the impact on hospital reimbursement of Medicare’s decision in October 1987 to eliminate older age (≥70 years) as a criterion for stratifying diagnosisrelated groups (DRGs). Methods: The 23 179 medical and surgical admissions to one academic medical center in 1985 through 1989 who were aged 65 years or more were studied using a retrospective cohort design. Clinical and financial data were obtained from hospital databases; charges and length of stay for each patient were adjusted for DRG weight, the measure used to determine reimbursement. Admission severity of illness was measured for 11 060 patients using the Nursing Severity Index, a previously validated method. Results: Compared with patients aged 65 to 69 years, DRG-adjusted charges were 1%, 5%, 5%, and 6% higher and DRG-adjusted length of stay was 4%, 11%, 16%, and 18% greater for patients aged 70 to 74 years, 75 to 79 years, 80 to 84 years and 85 years or more, respectively. In multivariate analyses, these estimates were similar, even after controlling for sex, race, socioeconomic status, and other variables associated with charges and length of stay. However, further controlling for severity of illness revealed that nearly all of the differences in charges and a large proportion of the differences in length of stay in older patients could be explained by their higher severity of illness. In separate stratified analyses, the association with age was stronger and more consistent in patients admitted after October 1987 and in medical patients. Conclusions: These findings suggest that currently hospitals may face financial disincentives to care for older Medicare patients and that the equitability of DRG-based hospital payments, with respect to age, may have been adversely affected by Medicare’s decision to eliminate older age (≥70 years) as a criterion for classifying DRGs. The inclusion of patient age in prospective payment formulas may make hospital reimbursement more equitable. © 1993, American Medical Association. All rights reserved.