Amid increased concerns about the adverse consequences of low health literacy, it remains unclear how health literacy affects health status and health service utilization. With a sample of 489 elderly Medicare patients in a Midwestern city in the USA, we explored the intermediate factors that may link health literacy to health status and utilization of health services such as hospitalization and emergency care. We expected to find that individuals with higher health literacy would have better health status and less frequent use of emergency room and hospital services due to (1) greater disease knowledge, (2) healthier behaviors, (3) greater use of preventive care, and (4) a higher degree of compliance with medication. Using path analysis, we found, however, that health literacy had direct effects on health outcomes and that none of these variables of interest was a significant intermediate factor through which health literacy affected use of hospital services. Our findings suggest that improving health literacy may be an effective strategy to improve health status and to reduce the use of expensive hospital and emergency room services among elderly patients.