A growing population of hospitalized elderly will need to make an increasing number of treatment decisions. No generally accepted criteria currently exist to assess the decision-making capacity of these elders. In this study, three hypothetical clinical vignettes were developed to assess treatment decision-making capacity in 25 presumably competent, medically ill, nondistressed, hospitalized elders and 25 healthy, age- and education-matched controls. The patients' understanding of the vignettes was evaluated and compared with their understanding of a standard consent form; with their performance on a mini-mental state examination; and with physician judgements about their decisional capacity. Vignette results indicate a significant difference between study and control groups in understanding of key treatment issues. Healthy controls demonstrated a better understanding of these issues. Twenty-eight percent of the patients had significant decisional impairments by vignette assessment but were not identified by mental status scores or physician judgments. Results suggest that presumably competent, medically ill elders may be at risk for developing decisional impairments during hospitalization for acute illness. Obtaining informed consent directly from many of these patients may not be feasible.