The tumor necrosis factor (TNF) antagonist etanercept is an antirheumatic agent which was approved by Japanese regulatory authorities in January 2005. In Japan, the cost-effectiveness of this therapy for patients with rheumatoid arthritis (RA) has not previously been evaluated. This study models the cost-utility of etanercept in comparison with standard therapy with disease-modifying antirheumatic drugs (DMARDs) among adult Japanese RA patients who have failed a previous course of the DMARD bucillamine. A Markov model with 6-month cycles was constructed to compare two therapeutic strategies: etanercept versus standard therapy. For each cycle, one of three options was possible: a patient could (i) remain on current therapy if American College of Rheumatology criteria for 20% clinical improvement (ACR20) were achieved, (ii) switch to another drug in the therapeutic pathway if ACR20 was not achieved or if side effects severe enough to cause treatment discontinuation occurred, or (iii) they could die. The therapeutic pathway for the etanercept strategy was etanercept, methotrexate (MTX), sulfasalazine (SSZ), combination therapy (MTX + SSZ) and, finally, no DMARD. The pathway for standard therapy was identical except the initial therapy was MTX (etanercept was excluded). Results from clinical trials in U.S. and European patient populations were used to derive model probabilities for disease progression, response to drug therapy, and relationships between ACR20 response and functional improvement as measured by the Health Assessment Questionnaire (HAQ) disability index. An equation was developed to predict utility from HAQ scores of Japanese patients. Costs for drugs and medical services in Japan were obtained for April 2003. Analysis was conducted from a societal perspective, including lost productivity costs due to RA disability and premature mortality. Costs were discounted at 6% annually, and quality-adjusted life years (QALYs) at 1.5% annually. Model parameters were varied by 20% above and below base-case values in sensitivity analyses. Compared to standard therapy, the etanercept strategy was yen6.39 million more costly per patient but yielded an additional 2.56 QALYs. The incremental cost-utility ratio was yen 2.50 million/QALY. Sensitivity analyses revealed that cost-utility was most strongly influenced by the acquisition cost of etanercept and the percentage of etanercept recipients who achieved ACR20. Using commonly applied thresholds for acceptable cost-effectiveness in the United States ($50 000 = yen 5.5 million/QALY) and the United Kingdom (pound 30 000 = yen 5.7 million/QALY), etanercept therapy in Japan can be considered cost-effective. Cost-utility ratios did not exceed these thresholds in any sensitivity analysis. Further analyses should be conducted once clinical and epidemiologic data for Japanese patients become available.