There is an increasing demand for acute care services due in part to rising proportions of older people and increasing rates of chronic diseases. To reduce pressure and costs in the hospital system, community-based post-acute care discharge services for older people have evolved as one method of reducing length of stay in hospital and preventing readmissions. However, it is unclear whether they reduce overall episode cost or expenditure in the health system at a more general level. In this paper, we review the current evidence on the likely costs and benefits of these services and consider whether they are potentially cost-effective from a health services perspective, using the Australian Transition Care Programme as a case study. Evaluations of community-based post-acute services have demonstrated that they reduce length of stay, prevent some re-hospitalisations and defer nursing home placement. There is also evidence that they convey some additional health benefits to older people. An economic model was developed to identify the maximum potential benefits and the likely cost savings from reduced use of health services from earlier discharge from hospital, accelerated recovery, reduced likelihood of readmission to hospital and delayed entry into permanent institutional care for participants of the Transition Care Programme. Assuming the best case scenario, the Transition Care Programme is still unlikely to be cost saving to a healthcare system. Hence for this service to be justified, additional health benefits such as quality of life improvements need to be taken into account. If it can be demonstrated that this service also conveys additional quality of life improvements, community-based programmes such as Transition Care could be considered to be cost-effective when compared with other healthcare programmes.