OBJECTIVES To analyze the relationship between comorbid conditions and costs for patients with AD and related dementias (ADRD) in a Medicare managed care organization (MCO). To derive implications for improving management of patients with ADRD. METHODS Retrospective analysis was carried out on administrative data for 3,934 patients with ADRD and 19,300 age/sex-matched control subjects enrolled in a large Medicare MCO. Patients with ADRD were identified from diagnoses on medical claims and encounter data for a 2-year period. Control subjects were selected from health plan members without dementia. Comorbid conditions were based on the diagnostic classifications from the Charlson comorbidity index. Health care costs and utilization for MCO-covered services for cases were compared with those of control subjects. RESULTS Prevalence of ADRD was 4.4%, substantially higher than reported in previous studies of Medicare managed care and similar to population-based estimates. After controlling for comorbid conditions, age, and sex, annual costs were $4,134 higher for ADRD patients, resulting in excess costs of $16 million to the MCO. For the 10 most prevalent comorbidities in ADRD patients, adjusted costs were higher for ADRD patients compared with control subjects with the same condition. Higher costs were attributable to higher inpatient and skilled nursing facility utilization. CONCLUSIONS In this study, prevalence rates for ADRD mirrored population estimates. Costs for patients with ADRD in this Medicare MCO varied considerably by comorbid condition and were substantially higher for patients with both AD and comorbid diseases commonly targeted for disease management, indicating that AD increases costs through effects on the management of comorbid illnesses. These findings indicate that better treatment and care management of AD could reduce the costs of comorbid illnesses commonly experienced by the frail elderly.