OBJECTIVES: To estimate the economic implications and health benefits of managing chronic osteoarthritis pain with once-daily OROS® hydromorphone compared with ER oxycodone two or three times a day from the perspective of German statutory health insurance. METHODS: A discrete event simulation was developed to follow a patient for a year from initiating oral opioid treatment. The optimal morphine dose is assigned according to the following base-case conversion ratios: hydromorphone (1:5), oxycodone (1:2). At the end of a dose adjustment period, patients can be satisfied or dissatisfied and stop medication. Pairs of identical patients are created; one receives hydromorphone, the other oxycodone; undergo dose adjustments, may suffer adverse events, recurrence of pain, or discontinue. Dissatisfied patients are prescribed other pain medications, steroid injections or surgery. Utilities are assigned pre-treatment, updated until reaching optimal dose, and when patient is non-compliant or dissatisfied. After one year, the quality-adjusted time and costs are recorded. Distributions of pain relief sleep quality, satisfaction and utilities are from clinical trial data. A pain specialist ensured the simulation reflects the course of managing non-malignant pain with opioids. Direct medical costs are in 2005 Euros. Sensitivity analyses were conducted. RESULTS: Based on 100 replications of 1,000 patient pairs over one year on a mean daily morphine equivalent dose of 90mg, 14% were dissatisfied. Average time to optimal dose with oxycodone was 7.9 weeks, approximately 3 weeks longer than hydromorphone. Costs per patient were estimated at €1959 with oxycodone vs. €2101 with hydromorphone. Hydromorphone was predicted to increase QALYs by a mean 0.017 years per patient, resulting in ICER = €8343/QALY gained. Sensitivity analyses revealed that results were most sensitive to the conversion ratios, with hydromorphone (1:7.5) being dominant over oxycodone. CONCLUSIONS: Based on these analyses, OROS® hydromorphone is expected to yield health benefits at a reasonable cost in Germany.