OBJECTIVE: The authors compared service utilization and costs for acutely ill psychiatric patients treated in a day hospital/crisis respite program or in a hospital inpatient program. METHOD: The patients (N = 197) were randomly assigned to one of the two programs and followed for 10 months after discharge. Both programs were provided by a community mental health center (CMHC) in a poor urban community. Data were collected for developing service utilization profiles and estimates of per-unit costs of the inpatient, day hospital, and outpatient services provided by the CMHC. RESULTS: On average, the day hospital/crisis respite program cost less than inpatient hospitalization. The average saving per patient was +7,100, or roughly 20% of the total direct costs. There were no significant differences between programs in service utilization or costs during the follow-up phase. Cost savings accrued in the index episode because per-unit costs were lower for day hospital/crisis respite and the average stay was shorter. Significant differences in cost were found among patient groups with psychosis, affective disorders, and dual diagnoses; psychotic patients had the highest costs in both programs. The two programs had roughly equal direct service staff and capital costs but significantly different operating costs (day hospital/crisis respite operating costs were 51% of inpatient hospital costs). CONCLUSIONS: The programs were equally effective, but day hospital/crisis respite treatment was less expensive for some patients. Potential cost savings are higher for nonpsychotic patients. Cost differences between the programs are driven by the hospital's relatively higher overhead costs. The roughly equal expenditures for direct service staff costs in the two programs may be an important clue for understanding why these programs provided equally effective acute care.