Alzheimer's disease is a progressive neurodegenerative disorder that results in tremendous economic and quality-of-life burdens. This paper presents estimates of the impact of tacrine use on the costs of caring for patients with Alzheimer's disease. This study presents a cost analysis, based on a decision-analytic model constructed around the milestones in the progression of Alzheimer's disease. Clinical data concerning the effectiveness of tacrine came from published results of an open-label follow-up study of 663 patients originally enrolled in a placebo-controlled clinical trial of tacrine. Data concerning longevity, nursing home time, and costs of community and nursing home care are taken from several reports based on prospective cohorts of patients. The use of tacrine was associated with a cost savings of $9,250 (7.5%) over the patient's lifetime from diagnosis to death, even when averaged over data from patients who discontinued tacrine treatment or took only low doses. Most of the savings were due to reduced time in nursing homes. Patients who continued higher doses of tacrine experienced a cost saving of more than $36,500 over 5 years. Model results persisted over a wide range of sensitivity analysis variations. The use of tacrine for patients with mild-to-moderate Alzheimer's disease reduces the costs of medical and social services required for care, and it increases functioning and delays nursing home placement for up to 433 days. New treatments that can both improve clinical outcomes and save costs should be given serious consideration by clinicians and administrators.