OBJECTIVE: To evaluate the economic effect of using risperidone in nursing home residents with documented behavioral and psychological signs and symptoms of dementia (BPSSD). METHODS: Based on data from a large 1995 nursing home data base, the average annual incremental cost of care due to BPSSD was calculated for three diagnosis groups (All Diagnoses, All Dementia, and Non-Dementia). These costs in 1997 US dollars included the increased reimbursement resulting from transition to a higher level of care and the more frequent physician visits due to BPSSD. These were compared with the cost of 1 mg per day risperidone therapy. RESULTS: BPSSD was documented in 13.5% of all nursing home residents; in 20% of those with dementia and in 11% in those without dementia. The annual cost of risperidone was estimated at $101, $148, and $85 per patient in each of these groups, respectively. The BD-related costs considering all patients, regardless of behavioral status, were $245, $383, and $195 per resident, respectively. Risperidone was estimated to break-even if 42% of BPSSD-related transitions to a higher level of care were prevented among all patients, 39% if only demented patients are considered and 44% for those without dementia. With higher effectiveness, treatment with risperidone would result in cost-savings. CONCLUSIONS: The use of risperidone in institutionalized patients with BPSSD should provide not only substantial relief of what can be a difficult-to-manage situation but also a favorable economic effect.