OBJECTIVES: Investigate the impact of paliperidone extended-release tablets (paliperidone ER), a newly available oral antipsychotic agent, on a healthcare formulary from a payer's perspective using a hybrid cost-effectiveness/budget impact approach. METHODS: An atypical oral antipsychotic formulary containing risperidone, olanzapine, aripiprazole, quetiapine and ziprasidone was compared to a formulary including the same 5 oral atypicals with the addition of paliperidone ER. Total medical costs and number of re-hospitalization stays were derived from Pharmetrics, a US outpatient insurance claims database with regionally representative coverage. Patients diagnosed with schizophrenia (ICD-9-CM code) in the year prior to initiating a new antipsychotic treatment with 1 full year retrospective and prospective data between January 2002-March 2005 were included. Marketshare was based on IMS Health NDTI MAT ending June 2006. Paliperidone ER was assumed to attain 10% utilization, comparable to latest market entrant. Costs included all schizophrenia-related inpatient and outpatient costs, and re-hospitalization stays in the one year following initiation of treatment. Treatment effect was quantified by adjusting observed values for each atypical for potential confounders including patient characteristics, prior hospitalizations and co-morbidity using generalized gamma regression (GLM). The adjusted outcomes of risperidone and olanzapine were used to simulate the costs and effects of paliperidone ER. Sensitivity analyses were performed on key assumptions and nonparametric bootstrapping was applied to observed data. RESULTS: An estimated $121 per patient in total annual medical cost savings (95% CI: 35.11-206.27) could be achieved with the addition of paliperidone ER to the formulary. Assuming a hypothetical cohort of 10,000 patients, this translates into yearly savings of $1.2 million. CONCLUSION: The addition of a new agent with similar efficacy and tolerability profile as paliperidone ER, may lead to a more cost-effective formulary.