BACKGROUND: Over diagnosis of malaria contributes to improper treatment, wastage of drugs and resistance to the few available drugs. This paper attempts to estimate the rates of over diagnosis of malaria among children attending dispensaries in rural Tanzania and examines the potential cost implications of improving the quality of diagnosis. METHODOLOGY/PRINCIPAL FINDINGS: The magnitude of over diagnosis of malaria was estimated by comparing the proportion of outpatient attendees of all ages clinically diagnosed as malaria to the proportion of attendees having a positive malaria rapid diagnostic test over a two month period. Pattern of causes of illness observed in a >2 year old cohort of children over one year was compared to the pattern of causes of illness in >5 year old children recorded in the routine health care system during the same period. Drug and diagnostic costs were modelled using local and international prices. Over diagnosis of malaria by the routine outpatient care system compared to RDT confirmed cases of malaria was highest among >5 year old children in the low transmission site (RR 17.9, 95% CI 5.8-55.3) followed by the ≥5 year age group in the lower transmission site (RR 14.0 95%CI 8.2-24.2). In the low transmission site the proportion of morbidity attributable to malaria was substantially lower in >2 year old cohort compared to children seen at routine care system. (0.08% vs 28.2%; p>0.001). A higher proportion of children were diagnosed with ARI in the >2 year old cohort compared to children seen at the routine care system ( 42% vs 26%; p>0.001). Using a RDT reduced overall drug and diagnostic costs by 10% in the high transmission site and by 15% in the low transmission site compared to total diagnostic and drug costs of treatment based on clinical judgment in routine health care system. IMPLICATIONS: The introduction of RDTs is likely to lead to financial savings. However, improving diagnosis to one disease may lead to over diagnosis of another illness. Quality improvement is complex but introducing RDTs for the diagnosis of malaria is a good start.