Concern for the rising costs of respiratory therapy in patient care caused a third party payor to implement reimbursement guidelines for inhospital delivery of oxygen (O2) therapy. While these guidelines are physiologically appropriate, their effectiveness in cost reduction has not been documented. To determine the effect of similar guidelines on the cost of O2 therapy, we prospectively studied 77 noncritically ill patients for whom physicians ordered O2. If pretreatment arterial blood gas determinations had not been ordered, ear oximetry was performed. The cost of O2 therapy to each patient, as based on total patient charges for O2, appliances, delivery, and assessment of oxygenation throughout hospitalization, was computed in three ways: Cost A, actual charges for O2 therapy initiated by physician order; Cost B, projected charges for O2 therapy using physiologic guidelines alone (PaO2 less than 60 mm Hg or SaO2 less than 90 percent); and Cost C, projected charges for O2 therapy using combined physiologic and clinical guidelines (PaO2 less than 60 mm Hg, SaO2 less than 90 percent or clinical record reasonably indicating hypoxemia). Of the 77 patients, 23 (30 percent) met the physiologic guidelines and 48 (62 percent) met the combined physiologic and clinical guidelines. The cost (total patient charges) of O2 therapy can be reduced through implementation of medical necessity guidelines, but physiologic guidelines alone appear more cost effective than combined physiologic and clinical guidelines.