We studied 843 children under 36 months of age enrolled in a prepaid health plan from September 1985 through March 1986, to identify characteristics of day care which might be risk factors for infection and to describe the resulting economic costs. Children cared for in their own home had a mean of 2.03 infections diagnosed during the study period. Adjusted rates of excess infection (95 per cent CI) for children cared for in other settings were: -.09 (-.73, .54) in relatives' homes; .10 (-.51, .71) in day care homes; .79 (.13, 1.45) in day care centers; .60 (-.24, 1.46) in mother's day out programs; and .66 (-.01, 1.34) in multiple settings. Children in day care centers were 4.5 times more likely to be hospitalized than those in other settings (95 per cent CI = 1.55, 13.00), primarily due to an increased rate of tympanostomy tube placement (relative risk 3.79, 95 per cent CI = 1.04, 13.36). The strongest predictor of illness risk was the number of other children in the room. The mean monthly cost of medical care was $32.94 for children in the highest risk settings compared with $19.78 for those in other settings. Illness in a child in our study accounted for 40 per cent of parental absenteeism from work; the mean number of days lost per month was 0.52 for parents of children in day care centers compared with 0.37 for those of children in other forms of full time care outside the home.