OBJECTIVE: Combination treatment with ribavirin and interferon alpha-2b in treatment-naïve patients with chronic hepatitis C virus produces an enhanced clinical response compared with interferon alpha-2b treatment alone; adding the second drug, however, will result in greater costs. Clinical effects and costs for combination therapy were compared to those for interferon alone in a cost-effectiveness analysis for the Canadian healthcare environment. METHODS: Data from an international clinical trial comparing 24 and 48 weeks of combination therapy to 48 week interferon alone were applied to a previously published model which tracked the health outcome of patients with chronic hepatitis C. Resource use and quality of life was determined by a Canadian physician panel and from patient-derived utility data; cost information in 1998 Canadian dollars was obtained from major health centres across Canada and from published sources of Canadian cost data. RESULTS: Resource use by patients with chronic hepatitis C can be minimal in the early stages of the disease, progressing to hospitalization and need for liver transplantation in the advanced stages. Applying dollar values to resource use, annual costs per disease state were found to range from under $200 per patient for the milder stages, up to greater than $90,000 per patient for transplantation. For drug treatment, interferon for 48 weeks cost $4,976 while combination therapy for 24 weeks was $9,887 and for 48 weeks $12,840. Modelling health outcomes over the course of the disease along with costs for combination therapy compared to interferon alone resulted in a marginal cost-effectiveness ratio of $3,429 per discounted quality adjusted life year. CONCLUSIONS: Results suggest that initial treatment for chronic hepatitis C in Canada with 24 or 48 weeks of combination therapy, when compared with 48 weeks of interferon alone, should be cost effective and economically attractive by conventional standards.