Postoperative management of the patient younger than 36 months undergoing adenotonsillectomy has been the subject of many debates. Concerns for early postoperative complications such as airway obstruction, emesis, dehydration, and hemorrhage have led many physicians to consider overnight hospitalization following adenotonsillectomy in very young children. Trends in health care management have had increasing focus on cost effective means of treating patients to limit unnecessary expenditure on the part of the patient, physician, and hospital facility. The purpose of this retrospective review was to analyze two methods of early postoperative management in children less than 36 months old undergoing adenotonsillectomy at the Children's Hospital, San Diego from 1992 to 1997. Three hundred and seven cases were reviewed. Same-day discharge was compared with overnight inpatient observation based on the cost analysis of these two methods of postoperative care. Postoperative care was based on length of stay in the recovery room and as an inpatient. Expense of postoperative care was based on cost calculation for the recovery room and overnight hospitalization. Of the 307 patients, 194 went home the day of surgery and 113 were observed overnight in the hospital. Average hospital cost was higher in the outpatient group than in the inpatient group (P < 0.001). This difference reflects longer recovery room stay (350 min) in the outpatient group compared to the inpatient group (108 min) (P < 0.001). Outpatient adenotonsillectomy in the patient under 36 months may be safe; however, prolonged recovery room stays may actually make outpatient surgery less cost-effective than overnight admission. Recovery room costs are significantly higher per unit time than costs of inpatient hospitalization. Further investigation of cost-effective outpatient observation units may improve cost containment in the outpatient surgical setting.