To estimate the national annual cost of rehospitalization for multiple-episode schizophrenia outpatients, and to determine the relative cost burden from loss of medication efficacy and from medication noncompliance, the yearly number of neuroleptic-responsive multiple-episode schizophrenia inpatients in the United States who are discharged back to outpatient treatment was estimated. The cohort at risk for future relapse and rehospitalization was determined. The research literature on the expected rates of relapse for schizophrenia patients on maintenance antipsychotic medication was reviewed; in particular, monthly relapse rates under the optimal medication conditions of compliant patients taking optimal doses of a depot neuroleptic (optimal neuroleptic dose) and under the less optimal conditions of patients stopping medication (medication noncompliant) was estimated. Using established noncompliance rates from the literature, it became possible to estimate a "real world" rehospitalization rate for this cohort, as well as the relative burden accruing from loss of medication efficacy and from medication noncompliance. Finally, cost estimates for index hospitalizations and rehospitalizations were derived from data on national expenditures for inpatient mental health care. The monthly relapse rates are estimated to be 3.5 percent per month for patients on maintenance neuroleptics and 11.0 percent per month for patients who have discontinued their medication. Postdischarge noncompliance rates in community settings are estimated to be 7.6 percent per month. These estimates were entered into a survival analysis model to determine the real world relapse rate of this cohort. An estimated 257,446 multiple-episode (> or = two hospitalizations) schizophrenia patients were discharged from short-stay (< or = 90 days) inpatient units in the United States during 1986. The estimated aggregate baseline inpatient cost for the index hospitalizations of this cohort was $2.3 billion (1993 dollars). Within 2 years after discharge, the aggregate cost of readmission approached $2 billion. Loss of neuroleptic efficacy accounted for roughly 60 percent of the rehospitalization costs and neuroleptic noncompliance for roughly 40 percent. The economic burden due to loss of efficacy is relatively higher during the first postdischarge year, whereas the burden from noncompliance is higher in the second year. Because loss of medication efficacy and medication noncompliance act synergistically on relapse, substantial inpatient cost savings can be realized by linking better pharmacologic treatments of schizophrenia with more effective strategies to manage medication noncompliance.