BACKGROUND: The Medi-Cal program in California added second-generation antipsychotic medications to its formulary in October 1997. OBJECTIVE: Investigate the impact of the formulary expansion on patient outcomes for olanzapine and risperidone patients before and after the formulary expansion. STUDY POPULATION: The study population consisted of 13,106 olanzapine and 15,718 risperidone ambulatory patients from the 100% Medi-Cal dataset, who were classified into 3 groups. New: no previous antipsychotic drug therapy history. Restarters: re-started antipsychotic drug therapy while not on active therapy. Switcher: who switched to one of these products while on active drug therapy. METHODS: Models of one-year treatment costs were estimated using both OLS regression and propensity score methods. Models included over 85 covariates for patient demographics, prior use of services, prior antipsychotic drug profile and diagnostic profile. Separate models were estimated for the 3 patient populations. Outcomes include total costs over one year broken down into component costs and days of uninterrupted drug therapy achieved after re-starting therapy. RESULTS: The formulary expansion immediately increased the number of new, switcher, restarter patients starting therapy with risperidone and olanzapine. Olanzapine patients were more likely to be male, between the ages of 30 and 60, urban residents and AFDC recipients. For restarters and switchers, Olanzapine patients also appear to be more compliant with their prior antipsychotic drug regimen. Once these differences were accounted for, Risperidone and olanzapine patients exhibited similar treatment cost profiles in the post-expansion period. CONCLUSIONS: More research is needed to determine if the formulary expansion reduced the cost of treating patients with schizophrenia. Furthermore, future comparison across drugs must take into account potential treatment selection bias and formulary expansion effects on the decision to start drug therapy.