OBJECTIVE: Cost-effectiveness of strategies for treating hepatitis C. METHODS: A decision analytic Markov model was created comparing strategies employing interferon and interferon+ ribavirin: 1)IFN=Interferon, 12 months 2)IFN/CMB=Interferon 12 months, followed by 6 months of combination therapy (Interferon+Ribavirin) for IFN failures 3)IFN/CMB-R= Interferon 12 months followed by 6 months of combination therapy for IFN relapsers 4)CMB=combination therapy, 6 months 5)CMB-G=Genotyping, followed by 12 months of combination therapy for genotype 1, 6 months for others. Interferon therapy was stopped after 3 months for non-responders. Sustained virologic response (SVR) 6 months post-treatment was considered to be a cure. There were 7 Markov states: well, chronic hepatitis C, compensated cirrhosis, decompensated cirrhosis, hepatic cellular carcinoma, liver transplantation, dead. Only direct medical costs were considered. Model parameters were from published literature, utility assessments of patients, Medicare fee schedules, wholesale drug prices. Patients were followed until death. Costs and health benefits were discounted at 3%. Sensitivity analyses were performed using 95% CI’s for probabilities, doubling and halving cost parameters, and wide ranges for utilities. RESULTS: The genotyping (CMB-G) strategy produced the highest SVR. Despite having the highest cost, its incremental cost-effectiveness ratio (ICER) was just $7,552/QALY (quality adjusted life year) compared to the second best strategy, IFN/CMB. All other strategies were dominated. The model was only sensitive to the response of genotype 1 to combination therapy. As the initial response rate of genotype 1 approaches the lower limit of the 95% CI, interferon followed by combination therapy (IFN/CMB) became cost-effective, with the ICER of genotyping reaching $137,000/QALY. CONCLUSION: Combination therapy, with duration based on genotype, is the most cost-effective treatment of chronic hepatitis C.