Donepezil is one of the first effective and well-tolerated medications approved for the treatment of Alzheimer's disease (AD). This study examined the impact of donepezil on the costs of AD in a multisite managed care organization between January 1, 1996, and March 31, 1998. A pretreatment/posttreatment study was conducted using retrospective medical and prescription claims data for 70 individuals with AD and related dementias who were prescribed donepezil. The outcomes of interest were costs during the pretreatment and posttreatment phases, which were categorized as medical, prescription, and combined costs. Per diem costs were adjusted for differences in the duration of follow-up. We found that median per diem medical costs were $1.22 lower in the posttreatment phase than in the pretreatment phase (P = 0.02). Moreover, posttreatment costs were reduced in 6 of 7 service settings, with median per diem savings of $0.77 in outpatient care (P = 0.002) and $0.65 in office visits (P < 0.001). In the posttreatment phase, the median per diem costs for prescriptions and all claims combined were higher by $2.59 (P < 0.001) and $2.11 (P = 0.04), respectively. Donepezil treatment was associated with a decrease in medical costs, particularly in the outpatient components of health care. However, overall costs were increased due to the higher costs of medication. Further pharmacoeconomic studies are needed to determine the exact impact of acetylcholinesterase-inhibitor therapy on the overall costs of care for individuals with dementia.