To determine the incidence rate of serious ulcer disease among users and nonusers of nonsteroidal anti-inflammatory drugs (NSAIDs), a retrospective cohort study was done on 103,954 elderly Tennessee Medicaid recipients with 209,068 person-years of follow-up from 1984 to 1986. There were 1,371 patients hospitalized with peptic ulcer disease or upper gastrointestinal hemorrhage identified by Medicaid hospital claims and verified by review of the medical record. Ulcer hospitalization rates by NSAID exposure category, duration of use, and daily dose were determined. The rates of ulcer hospitalization among nonusers and current users of NSAIDs were 4.2 and 16.7 per 1,000 person-years, respectively, an excess rate among current users of 12.5 (95% confidence interval (CI) 11.4-13.6) per 1,000 person-years. Among new users, the ulcer hospitalization rates were 26.3 per 1,000 person-years during the first 30 days of use and 20.9 per 1,000 person-years over the next 31-180 days, representing excess ulcer hospitalization rates of 22.1 (95% CI 18.6-25.6) and 16.7 (95% CI 13.1-20.1) per 1,000 person-years, respectively. For long-term users (180 days or more of continuous NSAID use), the ulcer hospitalization rate remained elevated at 15.3, an excess of 12.0 (95% CI 10.3-13.6) hospitalizations per 1,000 person-years. The excess hospitalization rates per 1,000 person-years increased with increasing dose from 6.0 (95% CI 4.0-8.0) for the lowest dose category to 17.8 (95% CI 15.5-20.1) for the highest. The excess rate of ulcer hospitalization for elderly NSAID users is high. These drugs should be used with caution in elderly persons, and alternatives to NSAID therapy should be strongly considered.