The objective of this study was to determine the cost effectiveness of outpatient pulmonary subspecialty consultations via telemedicine. A decision-analytic model was used to compare the cost effectiveness of providing outpatient telemedicine pulmonary consultations with alternative treatment methods. Model options included: (1) telemedicine, (2) routine care (patients travel from a remote site to the hub site to receive care), and (3) on-site care (patients receive care at the remote site). Cost and effectiveness data from the Milwaukee and Iron Mountain Veterans Affairs Medical Centers (VAMC) telepulmonary program were collected for a period of 1 year. The cost-effectiveness analysis was conducted from a societal perspective. Average and incremental cost-effectiveness ratios were calculated together with sensitivity analysis. Telemedicine was found to be more cost effective ($335 per patient/year) compared to routine care ($585 per patient/year) and on-site care ($1,166 per patient/year). Sensitivity analysis revealed that cost effectiveness of telemedicine was sensitive to changes in the values for the number of patients, probability of successful telemedicine consultation, telemedicine equipment cost, utility of telemedicine, and percentage effort assigned to the on-site pulmonary physician. Telemedicine is a cost-effective alternative for the delivery of outpatient pulmonary care for rural populations with limited access to subspecialty services. Cost effectiveness of telemedicine is related to three major factors: cost sharing, i.e., adequate patient volume and sharing of telemedicine infrastructure amongst various clinical users; effectiveness of telemedicine in terms of patient utility and successful clinical consultations; and indirect cost savings accrued by decreasing cost of patients' lost productivity.