To perform the first prospective longitudinal study of direct (health services utilized) and indirect costs (diminished productivity represented by income loss) incurred by patients with rheumatoid arthritis (RA) in Saskatoon and Montreal, followed for up to 12 and 4 years, respectively.1063 patients reported on health status, health services utilization, and diminished productivity every 6 months.Annual direct costs were $3788 (1994 Canadian dollars) in the late 1980s and $4656 in the early 1990s. Given that the average age exceeded 60 years, few participated in labor force activities or considered themselves disabled from the labor force and their indirect costs were substantially less, $2165 in the late 1980s and $1597 in the early 1990s. Institutional stays and medications made up at least 80% of total direct costs. Lengths of stay in acute care facilities remained constant, but the rate of hospitalization increased in the early 1990s, increasing average hospital costs per patient from $1563 in the late 1980s to $2023 in the early 1990s. For nonacute care facilities, rate of admission as well as length of stay increased over time, increasing costs per patient in Saskatoon 5-fold, from $291 to $1605. Those with greater functional disability incurred substantially higher direct and those under 65 years incurred higher indirect costs.Direct costs are higher than indirect costs. The major component is due to institutional stays that, in contrast to other direct cost components, is increased in the older and more disabled. Measures to reduce longterm disability by earlier, more aggressive intervention have the potential to produce considerable cost savings. However, it is unknown which strategies will have the greatest effect on outcome and accordingly, how resources can be optimally allocated.