OBJECTIVE: To model the costs and effects of alpha interferon in the treatment of chronic active hepatitis C. DESIGN: A Markov modelling process to simulate the costs and outcomes in hypothetical cohorts of patients treated with and without alpha interferon. OUTCOME MEASURES: Costs per life saved and per life-year gained. RESULTS: On the basis of assumptions formulated about the disease processes and response to treatment, treatment with alpha interferon results in a discounted cost per life-year gained of $33,230 in patients with cirrhosis at the start of treatment and $71,950 in patients without advanced liver disease. The result is sensitive to the assumptions made about the long term effectiveness of alpha interferon. CONCLUSIONS: Alpha interferon is an expensive drug. Its effectiveness is clouded by uncertainty about the long term impact of the drug on the natural history of the disease. If adopted, its use should be monitored to allow the long term cost effectiveness of the drug to be evaluated properly.