Surfactant replacement therapy for neonatal respiratory distress syndrome has the potential to reduce morbidity and mortality of very premature infants. To investigate whether surfactant replacement therapy will also reduce hospital charges for these infants, we compared the hospital charges incurred by a group of patients treated with surfactant with charges of control patients. Mortality in the surfactant-treated group (8%) was significantly decreased compared with the control patients (29%). Average daily hospital charges in the surfactant-treated patients were 25% less than for the control patients. Most of the savings in daily hospital charges were due to a 52% reduction in daily charges for laboratory, x-ray, respiratory therapy, and other ancillary services. Similarly, ancillary charges for the first full week of hospitalization were significantly reduced by $1,883 for patients who received surfactant therapy. Analysis of the charges for the entire hospitalization revealed that surfactant-treated patients had a significantly smaller proportion of their charges that resulted from ancillary services and an increased proportion due to room charges. The average total hospital charges for the two groups were similar, but the total hospital charges to produce a surviving infant were $18,500 less in the surfactant-treated group than the charges to produce a survivor from the control group. It is likely that, in addition to a reduction in neonatal mortality and morbidity from respiratory distress syndrome, surfactant replacement therapy may also significantly reduce charges for ancillary services for these patients. In this way, surfactant therapy may be cost-effective by improving survival without increasing overall hospital costs.