Liposomal formulations have been shown to alter the efficacy and toxicity profiles of anthracylines for patients with HIV-related advanced Kaposi's sarcoma (KS). Using decision-analysis models, the costs and cost-effectiveness of the two U.S. Food and Drug Administration (FDA)-approved liposomal formulations of these agents were estimated. Estimates of costs, effectiveness, and cost-effectiveness were derived from clinical trial data of separate, randomized phase III trials of pegylated liposomal doxorubicin (20 mg/m2 every 3 weeks) and liposomal daunorubicin (40 mg/m2 every 2 weeks). Clinical response rates were 59% for pegylated liposomal doxorubicin and 25% for liposomal daunorubicin. Despite higher acquisition costs for pegylated liposomal doxorubicin, total estimated costs of treatment for KS and chemotherapy-related hematologic toxicities were similar ($7,066 U.S. compared with $6,621 U.S. for liposomal daunorubicin). Cost-effectiveness profiles, defined as average costs per responder, favored pegylated liposomal doxorubicin ($11,976 U.S./responder versus $26,483 U.S./responder for liposomal daunorubicin), reflecting the higher reported response rate in the phase III trial. Sensitivity analyses suggested that the costs and cost-effectiveness results would not differ markedly when evaluated over a range of assumptions, including response rate, neutropenia rate, and dosage variations.