OBJECTIVE: The purpose of this study was to evaluate, from the perspective of California’s Medicaid program (Medi-Cal), the policy decision to include fluoxetine on its formulary. The analysis includes a review of the formulary adoption process, financial inducement, and data presented to the Medi-Cal program. METHODS: The time horizon for this analysis extends from 1996 to 2004 (the date of formulary inclusion until patent expiration). Using 1994-1997 values as a baseline, calculation of the incremental Net Present Value involved projecting fluoxetine’s acquisition price, pharmacy dispensing fee, manufacturer’s rebate, treatment authorization costs, CPI for prescription drugs and medical care, number of eligibles enrolled in Medi-Cal fee-for-service, fee-for-service eligibles to be transferred into managed care, population projections, and cost of intention to treat with fluoxetine (which included treatment failures). The net savings in cost-of-care per patient of $3,524 (1994 U.S. dollars, p=0.0024) was provided by previous research. The annual discount rate employed was 5.707%, the FY1996-1997 rate for the Pooled Money Investment Account (the State’s general funding for Medi-Cal). RESULTS: The model yielded a Net Present Value for fluoxetine formulary inclusion, which resulted in estimated savings to the State of between $1.025 billion and $1.760 billion over the 8-year timeframe. The sensitivity analysis involved varying the projected number of fee-for-service eligibles to be transferred into contracted managed care. CONCLUSION: The potential savings to be derived from the appropriate treatment of persons suffering from major depressive disorder are socially and economically significant. More emphasis should be placed on the appropriate pharmacotherapy of major depressive disorder, since the drug acquisition costs are minimal in comparison to the associated healthcare and indirect societal costs.