OBJECTIVE: The goal of this study was to determine whether clozapine is a cost-effective treatment for treatment-resistant schizophrenia. METHOD: Data were collected on 96 treatment-resistant patients with schizophrenia for 2 years before they entered a clozapine treatment study and for at least 2 years after they entered the study. Information about the cost of inpatient and outpatient treatment, housing costs, other costs, and family burden through direct interview or questionnaire of these patients and their families were available for 47 of the 96 patients. Data on lost income and Social Security disability insurance were also obtained. Outcome measures included psychopathology, quality of life, global functioning, work function, and rehospitalization. RESULTS: The cost of treatment was significantly decreased in the patients who continued clozapine treatment for at least 2 years. This was primarily due to a dramatic decrease in the frequency and cost of rehospitalization. Costs were nonsignificantly lower in patients who dropped out of treatment. The estimated total 2- year cost for the 59 patients who continued clozapine treatment, the 34 patients who dropped out, and the three who interrupted treatment decreased from $7,390,206 to $5,719,463, a savings of $8,702/year per patient. There was a decrease in total costs of $22,936/year for the 37 patients who continued clozapine treatment for whom cost data were available. There were no significant changes in lost income or Social Security disability insurance payments in either group. Clozapine produced a marked improvement in Brief Psychiatric Rating Scale total scores as well as positive negative symptom scores, Global Assessment Scale scores, Quality of Life Scale scores, work functioning, capacity for independent living, and rehospitalization rates. CONCLUSIONS: Clozapine is a cost-effective treatment for treatment-resistant schizophrenic patients. Cost savings result almost exclusively from the reduced cost of hospitalization.