The Macarthur Health Service introduced an innovative Acute Ambulatory Care Service (MACS) in 2000. The service was designed to substitute patient care previously provided in hospital beds with care in the patient’s home. The financial implications of complete or partial substitution of hospital care were explored using local data sources from the introduction of the service in 2001–2002. These data were analysed using the NSW Department of Health cost of care methodology. This study determined that episodes of care in MACS were less costly than equivalent episodes of inpatient care for selected diagnoses. The Macarthur cost of care data confirmed substantial savings (63%) in cases in certain diagnostic groups (cellulitis, pneumonia) with complete substitution, and lower savings (50%) for partial substitution of care when compared with hospital admission. Savings are likely to be greater as the level of substitution increases and are dependent on the choice of ambulatory sensitive diagnoses.