OBJECTIVE: Although physical function is believed to be an important predictor of outcomes in older people, it has seldom been used to adjust for prognosis or case mix in evaluating mortality rates or resource use. The goal of this study was to determine whether patients' activity of daily living (ADL) function on admission provided information useful in adjusting for prognosis and case mix after accounting for routine physiologic measures and comorbid diagnoses. SETTING: The general medical service of a teaching hospital. PARTICIPANTS: Medical inpatients (n = 823) over age 70 (mean age 80.7, 68% women). MEASUREMENTS: Independence in ADL function on admission was assessed by interviewing each patient's primary nurse. We determined the APACHE II Acute Physiology Score (APS) and the Charlson comorbidity score from chart review. Outcome measures were hospital and 1-year mortality, nursing home use in the 90 days following discharge, and cost of hospitalization. Patients were divided into four quartiles according to the number of ADLs in which they were dependent. MAIN RESULTS: ADL category stratified patients into groups that were at markedly different risks of mortality and higher resource use. For example, hospital mortality varied from 0.9% in patients dependent in no ADL on admission, to 17.4% in patients dependent in all ADLs. One-year mortality ranged from 17.5% to 54.9%, nursing home use from 3% to 33%, and hospital costs varied by 53%. In multivariate analyses controlling for APS, Charlson scores, and demographic characteristics, compared with patients dependent in no ADL, patients dependent in all ADLs were at greater risk of hospital mortality (odds ratio [OR] 13.7; 95% confidence interval [CI] 3.1-58.8), 1-year mortality (OR 4.4; 2.7-7.4), and 90-day nursing home use [OR 14.9; 6.0-37.0). The DRG-adjusted hospital cost was 50% higher for patients dependent in all ADLs. ADL function also improved the discrimination of hospital and 1-year mortality models that considered APS, or Charlson scores or both. CONCLUSIONS: ADL function contains important information about prognosis and case mix beyond that provided by routine physiologic data and comorbidities in hospitalized elders. Prognostic and case-mix adjustment methods may be improved if they include measures of function, as well as routine physiologic measures and comorbidity.