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Numerous study findings suggest that the use of laparoscopy is associated with lower health care costs for many operations, including colectomy. The extent to which these differences are due to the laparoscopic approach itself or selection bias from healthier patients undergoing the less invasive procedure is unclear.To evaluate the differences in Medicare expenditures for laparoscopic and open colectomy.A population-based study was conducted of Medicare beneficiaries undergoing laparoscopic or open colectomy between January 1, 2010, and December 31, 2012. The dates of the analysis were November 13 to December 10, 2016. Using instrumental variable methods to account for selection bias, actual Medicare payments after each procedure were evaluated. To identify the mechanisms of potential cost savings, the frequency and amount of physician, readmission, and postacute care payments were evaluated. Several sensitivity analyses were performed restricting the study population by patient demographic or surgeon specialty.Actual Medicare expenditures up to 1 year after the index operation.The study population included 428 799 patients (mean [SD] age, 74  years; 57.0% female). When using standard methods, patients undergoing laparoscopic colectomy (vs open) had lower total Medicare expenditures (mean, −$5547; 95% CI, −$5408 to −$5684; P < .01). When using instrumental variable methods, which account for potentially unmeasured patient characteristics, patients undergoing laparoscopic colectomy (vs open) still had lower Medicare expenditures (mean, −$3676; 95% CI, −$2444 to −$4907; P < .01), although the magnitude of the association was reduced. When examining the root causes of the difference in costs between patients who underwent laparoscopic and open colectomy, the key drivers were a reduction in costs from readmissions (mean, −$1102; 95% CI, −$1373 to −$831) and postacute care (mean, −$1446; 95% CI, −$1988 to −$935; P < .01).This population-based study demonstrates the influence of selection bias on cost estimates in comparative effectiveness research. While the use of laparoscopy reduced total episode payments, the source of savings is in the postacute care period, not the index hospitalization.