The long-term efficacy of clozapine therapy and its effect on health care costs were examined over a two-year period. Patients on clozapine showed marked clinical improvement as measured by the Brief Psychiatric Rating Scale. They also had significantly lower rates of rehospitalization and hospitalization costs than a cornparison group of schizophrenic patients who received standard neuroleptic treatment and who were considerably less psychotic at hospital admission. By the second year of the study, savings on mental health care costs averaged $20,000 for each patient on clozapine therapy. The savings were due largely to the patients' change in residence from costly inpatient facilities to less expensive settings in the community.