The atypical antipsychotic agent olanzapine became available for use at the Denver VA Medical Center late in 1996. Acquisition costs are significant, and warrant economic analysis. OBJECTIVE: The purpose of this study is to examine the impact of olanzapine therapy on costs of care for patients at this medical center. METHODS: A total of 59 patients receiving olanzapine were identified from pharmacy databases. Of these patients, 25 received the drug for at least 6 months. Data were compiled for psychiatry-related prescriptions, clinic visits, and inpatient stays. All cost comparisons reported are for the 6-month time periods before and after initiation of olanzapine therapy. Costs for prescriptions reflect drug acquisition costs. Costs for clinic visits and inpatient stays were calculated using average unit costs. A paired t-test was used to compare means. RESULTS: The following per-patient results were obtained: mental health clinic visits decreased by 32.3 (sd +/- 44.4, p = 0.001), hospital admissions fell by 0.6 (sd +/- 0.9, p = 0.003), and average length of stay decreased by 19.5 days (sd +/- 34.5, p = 0.009). The average number of active prescriptions per patient increased from 3.4 to 3.5, while the average cost per patient of those prescriptions increased from $586 to $2,230. Total costs changed as follows: pharmacy costs increased from $14,700 to $55,800, costs for clinic visits and hospitalizations fell from $131,100 to $93,100 and from $301,100 to $90,700, respectively. Overall cost per patient decreased from $17,900 to $9,600. CONCLUSIONS: While an increase in pharmacy costs after initiation of olanzapine therapy was seen, overall costs of psychiatry-related care decreased in this patient population.