Background. We found previously that the clinical advantages of living donor (LD) renal transplantation lead to financial cost savings compared to either cadaveric donation (CAD) or dialysis. Here, we analyze the sources of the cost savings of LD versus CAD kidney transplantation. Methods. We used United States Renal Data System data to merge United Network for Organ Sharing registry information with Medicare claims data for 1991-1996. Information was available for 42,868 CAD and 13,754 LD transplants. More than 5 million Medicare payment records were analyzed. We calculated the difference in average payments made by Medicare for CAD and LD for services provided during the first posttransplant year. Results. Average total payments were $39,534 and $24,652 for CAD and LD, respectively (P<0.0001) during the first posttransplant year. The largest source of the difference in payments was in inpatient hospitals, representing $10,653.67 (P<0.0001). For patients who had Medicare as the primary payer, average transplant charges were significantly higher for CAD donation ($79,730 vs. $69,547, P<0.0001); average transplant payments demonstrated no statistical differences ($28,483 vs. $28,447, P=0.858). Therefore, inferred profitability was significantly higher for LD. Conclusions. Medicare payments are remarkably lower for LD compared to CAD in every category. The single largest cost saving comes from inpatient hospital services. A portion of the savings from LD could be invested in programs to expand living kidney donation.