Background: The treatment of obesity and related comorbidities are significant financial burdens and sources of resource expenditure. This study was conducted in order to assess the impact of weight-reduction surgery on health-related costs. Methods: This was an observational two-cohort study. The treatment cohort included patients having undergone weight-reduction (bariatric) surgery at the McGill University Health Centre (MUHC) between 1986 and 2002. The control group included age and gender matched obese patients who had not undergone weight-reduction surgery from the Quebec provincial health insurance database (RAMQ). The cohorts were followed for a maximum of 5 years from inception. The primary outcome measure was overall direct healthcare costs. Secondary outcomes included cost analysis by diagnostic category for the treatment of new medical conditions following cohort inception. Results: The cohorts were well-matched for age, gender and duration of follow-up. Patients having undergone bariatric surgery had significant reductions in mean percent initial excess weight loss (67.1%, P <0.001) and in percent change in initial body mass index (34.6%, P <0.001). Bariatric surgery patients had higher total costs for hospitalizations (per 1,000 patients) in the first year following cohort inception (surgery cohort = CDN 12,461,938; control cohort = CDN12,461,938; control cohort = CDN 3,609,680). At 5 years after cohort inception, average cumulative costs for operated patients were CDN 19,516,667 versus CDN19,516,667 versus CDN 25,264,608, for an absolute difference of almost CDN $6,000,000 per 1,000 patients. Conclusion: Weight-reduction surgery in morbidly obese patients produces effective weight loss and decreases long-term direct health-care costs. The initial costs of surgery can be amortized over 3.5 years.