OBJECTIVE: Over 75% of individuals with Alzheimer's disease (AD) residing in nursing homes have behavioral and psychological signs of dementia (BPSD). Quetiapine is an atypical antipsychotic that has demonstrated effectiveness in the treatment of BPSD. This analysis examines the health economic implications of treating patients with AD and BPSD with quetiapine at a dose of 200mg per day. METHODS: A discrete event simulation was developed to compare treatment of institutionalized AD patients in the US with quetiapine relative to no pharmacological treatment. The model follows individuals over one year, tracking changes in BPSD and the resulting influence on costs. Effectiveness and treatment persistence estimates are based on a randomized, double-blind trial comparing quetiapine to placebo, while BPSD related nursing home costs are derived from the Minnesota Case Mix Research Database and published information. Costs in the simulation, which are reported in 2004 US dollars, include nursing home per diems, physician visits, psychiatric and behavioral services, and treatment with quetiapine. The primary effectiveness outcome is time without clinically significant BPSD. RESULTS: Untreated patients incur costs averaging $49,350 per year, clinically significant BPSD apparent 87% of the time. Treatment with quetiapine costs $1142 per year, but this is entirely offset in savings from other areas, resulting in net savings of $44 per year. At the same time, patients spend seven fewer weeks with clinically significant BPSD. In repeated simulations, quetiapine dominated no treatment in almost 60% of replications. In 94% of replications, quetiapine was either dominant or led to incremental costs per BPSD year avoided of under $5000. Sensitivity analyses showed that variations in BPSD-specific nursing home costs had the strongest impact on outcomes. CONCLUSIONS: These analyses indicate that quetiapine in patients with AD and BPSD is cost-effective and may even lead to overall health care system savings.