This study, based on all very low birthweight (VLBW) single live births covered by the state of California's Medicaid program between the years 1984 and 1987, is the largest and most comprehensive to date of treatment costs for this high-risk infant group. Treatment costs and Medicaid expenditures are measured for the initial hospitalization and during the remainder of the first year of life. The study reconfirms the high-risk nature of these infants, with 33 percent of infants dying before the end of their first year of life. VLBW infants are also extremely expensive to care for, with treatment costs for the initial hospitalization averaging $54,900 (in 1987 constant dollars). Some infants have catastrophic expenditures; for instance, the average cost of the initial hospitalization for surviving infants with birthweights between 500 and 749 grams is $157,000. Medicaid expenditures for the care of VLBW infants are high, both because treatment costs are high and because the program pays for many of these births. Medicaid reimbursements do not cover treatment costs, however, creating a financial strain on the providers of their care. The authors conclude that policies that aim to reduce the incidence of VLBW births, such as encouraging prenatal care, have the potential to be extremely cost effective. Each VLBW birth avoided saves over $50,000 in the cost of the initial hospitalization. Significant savings can accrue with only minor gains in the birthweight of the infant. For instance, among surviving infants with the lowest birthweights (between 500 and 749 grams), an increase in weight at birth of only 500 grams results in a $90,000 cost savings during the initial hospitalization. The report will be of value to all persons interested in the treatment costs of VLBW infants and Medicaid expenditures for their care. It should be particularly useful to policymakers in quantifying the cost-effectiveness of prenatal care and other strategies aimed at improving birth outcomes.