The clinical effectiveness and costs of telemedicine in improving the referral process from primary to secondary care were examined in an eight-month prospective, comparative study with one-year follow-up. The internal-medicine outpatient clinics of two Finnish district hospitals were compared--Peijas Hospital (PH) with telemedicine and Hyvinkää Hospital (HH) without it. The three primary-care centres studied referred a total of 292 adult patients to the outpatient clinics. The population-based number of referrals to PH (7.5/1000) from primary-care centres was twice that to HH (3.8/1000). Thirty-seven per cent of referrals to PH included requests from general practitioners for on-line medical advice (teleconsultation). Forty-three per cent of the total number of intranet referrals resulted in outpatient visits at PH, compared with 79% in the outpatient clinic at HH. Only 18% of the patients receiving a teleconsultation ended up in the outpatient department of PH within one year. These visits were mainly due to progression of chronic disease. No deaths or missed diagnoses could be attributed to telemedicine, but one diagnosis was delayed. The direct costs of an outpatient clinic visit in internal medicine (EU211) were seven times greater per patient than for an e-mail consultation (EU32), with a marginal cost decrease of EU179 for every new intranet consultation. A cost-minimization analysis of the alternative interventions showed a net benefit of EU7876 in favour of the teleconsultation process. General practitioners sought an outpatient visit for 130 of their patients, and advice only for another 77. On-line advice was nonetheless given in 108 cases, and only 88 patient visits were arranged. Eleven referrals were declined. The cost difference between giving on-line medical advice for the 108 cases and a visit to the outpatient clinic for the other 88 was less costly (by EU4140) than investigating the 124 patients whose original clinic referrals to the PH were not declined. Productivity in the hospital increased over threefold by using e-mail consultations instead of traditional outpatient visits. The wide interactive use of the intranet referral system between secondary and primary care improved clinical effectiveness, lowered direct costs, increased productivity and was cost-effective.