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OBJECTIVE: To determine the cost-effectiveness of Assertive Community Treatment (ACT) in comparison to Standard Case Management (SCM) for persons with severe mental illness and substance use disorders. DATA SOURCES AND STUDY SETTING: Original data on the effectiveness and social costs of ACT and SCM that were collected between 1989 and 1995. Seven community mental health centers in New Hampshire provided both types of treatment. STUDY DESIGN: Persons with schizophrenia, schizoaffective disorder, or bipolar disorder and a concurrent substance use disorder were randomly assigned to ACT or SCM and followed for three years. The primary variables assessed were substance use, psychiatric symptoms, functioning, quality of life, and social costs. DATA COLLECTION METHODS: Effectiveness data were obtained from interviews at six-month intervals with persons enrolled in treatment and with their service providers. Social cost and service utilization data came from client reports; interviews with informal caregivers; provider information systems and Medicaid claims; law enforcement agencies; courts; and community service providers. PRINCIPAL FINDINGS: Participants in both groups showed significant reductions in substance use over time. Focusing on quality of life and substance use outcomes, ACT and SCM were not significantly different in cost-effectiveness over the entire three-year study period. Longitudinal analyses showed that SCM tended to be more efficient during the first two years but that ACT was significantly more efficient than SCM during the final year of the study. CONCLUSIONS: In an adequately funded system, ACT is not more cost-effective than SCM. However, ACT efficiency appears to improve over time.