Osteoporosis is a common, debilitating disease affecting US Medicare beneficiaries, yet diagnosis and treatment lag behind medical advances. We estimated the cost of fractures to the Medicare program and the impact of increasing osteoporosis diagnosis and treatment. A Markov model was used to predict fracture incidence and costs in postmenopausal women aged 65 years and older, over 3 years (2001-2003). Only 1.80 million women were estimated to receive a Medicare-reimbursed bone mineral density (BMD) test in 2001. We evaluated the budget impact of testing an additional 1 million women from Medicare and patient perspectives. These women were stratified into high-risk (osteoporotic with prevalent vertebral fracture) and moderate-risk (without prevalent vertebral fracture) groups. During 2001-2003, an estimated 2.39 million fractures occurred among the 5.11 million women aged 65+ with osteoporosis, at a cost to Medicare of 12.96 billion dollars. We projected that BMD testing of an additional 1 million women in 2001 would result in treatment of 440,000 new patients with a bone-specific medication, preventing over 35,000 fractures over the 3 years. The decrease in fractures would produce a net discounted savings to the Medicare budget of 77.86 million dollars. Medicare's hospital inpatient cost would decrease by 115.41 million dollars and long-term care cost by 43.51 million dollars, more than offsetting incremental outpatient cost of 81.07 million dollars. Patients would benefit from fracture avoidance, but their out-of-pocket medical costs would increase by 63.49 million dollars during 2001-2003, or 1,771 dollars per fracture avoided. Sensitivity analyses showed that savings to the Medicare program varied in proportion to the unit cost of fractures, fracture risk of the populations tested, treatment rate, and adherence to therapy. Increased osteoporosis diagnosis may produce savings for the Medicare program if interventions are targeted to women at elevated risk for fracture and may be budget neutral if all older women are screened.