BACKGROUND: The financial ability to pay for food and medical care is needed to maintain health in older persons following a serious illness. Therefore, we hypothesize that the inability to pay for basic needs, which we call financial disability, predicts adverse health outcomes in older patients discharged from the hospital. OBJECTIVES: To determine the frequency of reported financial disability in older adults being discharged from a hospital, to determine patient characteristics associated with financial disability, and to examine the relationship between financial disability and functional decline and mortality. DESIGN: Prospective cohort study. SETTING/PARTICIPANTS: Two thousand two hundred patients 70 years and older admitted to the general medicine services at two teaching hospitals in Ohio. MAIN OUTCOME MEASURES: Respondents were interviewed at the time of discharge to determine patients' financial ability to pay for 6 needs: groceries, general bills, medications, medical bills, a small emergency, and a major emergency. We determined functional decline in ability to perform activities of daily living from discharge to 90 days post-hospital discharge, and death 1 year after hospital discharge. RESULTS: Financial disability was reported to be severe (unable to pay for 3-6 needs) for 21% of patients and moderate (unable to pay for 1-2 needs) for 36%. Financial disability was more common and more severe (P<.001) in persons with an annual household income less than $10,000, in persons with fewer than 12 years of formal education, in African Americans, and in women. In patients with no financial disability, moderate financial disability, and severe financial disability, functional decline 3 months after hospital discharge occurred in 15%, 20%, and 25%, respectively (P=.001), and 1-year mortality rates were 24%, 27%, and 32%, respectively (P=.002). After adjustment for potential confounders, the association of financial disability with functional decline (P=.003) and mortality (P=.02) remained significant. CONCLUSION: Reports of financial disability at hospital discharge identified vulnerable older adults with increased risk for functional decline and death. Interventions that alleviate financial disability may improve health outcomes in older adults discharged from hospital.