Background: More than 50% of the elderly population has not received pneumococcal vaccination. Uncertainty regarding the benefits of immunization, particularly for noninvasive disease, may contribute to the underuse of pneumococcal vaccine. Objective: To assess the health and economic benefits associated with pneumococcal vaccination. Methods: We conducted a 2-year retrospective cohort study among all elderly members of a staff-model managed care organization who had a baseline diagnosis of chronic lung disease. The study outcomes were assessed over 2 years, from November 15, 1993, through November 14, 1995, and included hospitalizations for pneumonia and influenza, death, and hospitalization costs. Using administrative data, we compared these outcomes for vaccinated and unvaccinated subjects using multivariate models to control for subjects' baseline demographic and health characteristics. The additive benefits of combined influenza and pneumococcal vaccination were also assessed for the 2 influenza seasons included in the study. Results: There were 1898 subjects. Pneumococcal vaccination was associated with significantly lower risks for pneumonia hospitalizations (adjusted risk ratio [RR], 0.57; 95% confidence interval [CI], 0.38-0.84; P = .005) and for death (adjusted RR, 0.71;95% CI, 0.56-0.91; P = .008). For the control outcome of all nonpneumonia hospitalizations, rates did not differ significantly between the 2 groups (adjusted RR, 0.91; 95% CI, 0.77-1.07; P= .24). During the influenza seasons included in the study, the benefits of pneumococcal and influenza vaccinations were additive, with an adjusted RR of 0.28 (95% CI, 0.140.58; P<.001) for the number of hospitalizations for pneumonia and influenza among persons who had received both vaccinations compared with those who had received neither and an adjusted odds ratio of 0.18 (95% CI, 0.11-0.31; P<.001) for death. Over the 2-year outcome period, pneumococcal vaccination was also associated with direct medical care cost savings. Conclusions: Pneumococcal vaccination of elderly persons with chronic lung disease was associated with fewer hospitalizations for pneumonia, fewer deaths, and direct medical care cost savings.