Noninvasive positive pressure ventilation (NPPV) is effective in the treatment of acute and chronic respiratory failure. However, the costs and financial balance between costs and diagnosis-related group (DRG) reimbursement for patients with moderate to severe respiratory failure treated with NPPV are unknown. We examined the costs and DRG reimbursement for 27 patients receiving Medicare referred with moderately severe respiratory failure for NPPV to the ventilator rehabilitation unit (VRU) at Temple University Hospital. This unit is one of four Health Care Financing Administration chronic ventilator-dependent demonstration sites that evaluates patients for NPPV, instructs them in home NPPV use, emphasizes rehabilitation, and uses strict cost accounting methods. Nineteen patients were treated with NPPV in the ICU and then referred to the VRU, and 8 patients were directly admitted for NPPV to the VRU. Patients were (mean +/- SE) 69 +/- 9 years age, 14 had severe COPD, and 13 had various restrictive disorders. All were hypercapneic at the time of hospital admission (restrictive 60 +/- 15; obstructive 67 +/- 3 mm Hg, PaCO2) with impaired lung mechanics and limited functional status. Patients averaged 8 +/- 15 days in the ICU, or 8 +/- 4.7 days on the medical floor prior to VRU transfer. The VRU length of stay averaged 20 +/- 18 days, for a total length of stay of 29 +/- 21 days. After implementation of NPPV, all patients had an improvement in gas exchange while spontaneously breathing and functional status that was maintained in follow-up. At 1 and 2 years of follow-up, 74% and 63% of patients were alive, respectively. Eleven patients were admitted with DRG 475 (respiratory system diagnosis with ventilator support); however, 16 of 27 patients were admitted across five different non-475 DRG codes with reimbursement rates ranging from $2,673 to $4,215. After DRG and outlier reimbursement, a total deficit of $261,948 remained (average deficit $9,701 per patient). However, individual patient deficits ranged from $1,113 to $32,892. Eighty-two percent of patients treated with NPPV incurred substantial financial losses that were underreimbursed across all assigned DRGs, including DRG 475, the highest-weighted DRG. We conclude that patients with moderate to severe respiratory failure receiving NPPV demonstrate an improvement in functional status and gas exchange that is maintained in follow-up. In addition, patients treated with NPPV incur high costs that are currently underreimbursed by the present DRG system. Newer DRG payment scales that recognize NPPV as specific treatment should be implemented.