OBJECTIVES: To re-evaluate the cost effectiveness of treating hepatitis C virus (HCV) infection with interferon alfa (IF alpha) in Australia, taking into account changes in clinical practice. DESIGN: A decision-analytic method (Markov model) was used to simulate the costs and effects of 6 months and 12 months of treatment with IF alpha versus no treatment (conventional management). Both costs and effects were modelled over 30 years. DATA SOURCES: Published meta-analysis of the effectiveness of treatment, professional judgement about treatment protocols, scheduled medical fees, diagnosis-related costs for hospital admission, and a literature search for quality-of-life weights. PATIENTS: A hypothetical cohort of 1000 patients with chronic HCV infection aged 40 years at the start of treatment. MAIN OUTCOME MEASURES: Incremental costs per life-year gained and per quality-adjusted life-year (QALY) gained. RESULTS: Compared with no treatment, IF alpha treatment for 6 months results in an extra 94.2 life-years or 320.1 QALYs at an extra cost of $1.8 million (after discounting at 3%) in a cohort of 1000 patients. Discounted cost per life-year gained is $19,110, which is about a quarter of the cost reported in 1994. The discounted cost per QALY gained is $5625. Extended treatment for another 6 months results in an additional 89.0 life-years saved or 170.8 QALYs gained at an incremental discounted cost of $15,835 per life-year gained and $8250 per QALY gained. CONCLUSIONS: The cost effectiveness of IF alpha treatment for HCV infection has improved as a result of better patient selection, cost reductions and enhanced effectiveness of extended treatment. The results are sensitive to assumptions made about quality of life and the discount rate.