OBJECTIVE: To estimate influenza vaccine effectiveness (VE) in preventing hospitalizations in persons over 50 years of age. DESIGN: We performed a retrospective, population based study, using a ‘difference-in-differences’ approach to determine the association between hospitalization and prior vaccination. We examined this association when influenza was not circulating and compared it to the association found when influenza was circulating. VE was estimated from the difference in the association between hospitalization and prior vaccination, inside vs. outside influenza seasons. SETTING: Kaiser Permanente in Northern California. PATIENTS: Health plan members aged 50 years and older during the September 1997 to August 2008 study period, when there were about 68,000 pneumonia hospitalizations in 10 million person-years. RESULTS: Vaccination was associated with lower risk of hospitalization for pneumonia and influenza, even before flu season, presumably due to unmeasured confounders. When influenza arrived the hospitalization-vaccination association strengthened, yielding an adjusted VE estimate of 12.4% (95% CI: 1.6-22.0) in persons aged 50-64, and 8.5% (95% CI: 3.3-13.5) in those aged 65 years and older. There was no significant effect on hospitalizations for ischemic heart disease (IHD), congestive heart failure (CHF), cerebrovascular disease (CVD), or trauma. CONCLUSIONS: Influenza vaccination has a modest but significant effect on prevention of hospitalization for pneumonia and influenza in persons 50 years of age and older.