Background. Despite recommendations for annual vaccination against influenza, more than half of elderly Americans do not receive this vaccine. In a serial cohort study, we assessed the efficacy and cost effectiveness of influenza vaccine administered to older persons living in the community. Using administrative data bases, we studied men and women over 64 years of age who were enrolled in a large health maintenance organization in the Minneapolis-St. Paul area. We examined the rate of vaccination and the occurrence of influenza and its complications in each of three seasons: 1990-1991, 1991-1992, and 1992-1993. Outcomes were adjusted for age, sex, diagnoses indicating a high risk, use of medications, and previous use of health care services. Each cohort included more than 25,000 persons 65 years of age or older. Immunization rates ranged from 45 percent to 58 percent. Although the vaccine recipients had more coexisting illnesses at base line than those who did not receive the vaccine, during each influenza season vaccination was associated with a reduction in the rate of hospitalization for pneumonia and influenza (by 48 to 57 percent, P â‰¤ 0.002) and for all acute and chronic respiratory conditions (by 27 to 39 percent, P â‰¤ 0.01). Vaccination was also associated with a 37 percent reduction (P = 0.04) in the rate of hospitalization for congestive heart failure during the 1991-1992 season, when influenza A was epidemic. The costs of hospitalization for all types of illness studied were lower in the vaccinated group during 1991-1992 (range of reduction, 47 to 66 percent; P<0.005) and for acute and chronic respiratory conditions and congestive heart failure in 1990-1991 (reductions of 37 percent and 43 percent, respectively; P â‰¤ 0.05). Direct savings per year averaged $117 per person vaccinated (range, $21 to $235), with cumulative savings of nearly '5 million. Vaccination was also associated with reductions of 39 to 54 percent in mortality from all causes during the three influenza seasons (P<0.001). For elderly citizens living in the community, vaccination against influenza is associated with reductions in the rate of hospitalization and in deaths from influenza and its complications, as compared with the rates in unvaccinated elderly persons, and vaccination produces direct dollar savings.