Statistics Canada (Ottawa, Ontario, Canada) is in the process of developing the Population Health Model to simulate the health and common illnesses of Canadians. The Population Health Model incorporates a lung cancer module that is based on contemporary Canadian practice. This microsimulation model can be used to estimate the total direct care costs of treating all lung cancer cases diagnosed in Canada and to evaluate the cost and cost-effectiveness of new therapeutic interventions as they are introduced into practice. Gemcitabine, a new nucleoside analogue with a broad spectrum of antitumor activity, is about to be introduced on the Canadian market. The Population Health Model has been used to estimate the cost-effectiveness of gemcitabine in the management of lung cancer over a range of drug doses per treatment cycle starting at 1,000 mg/m2 weekly x 3, as well as potential survival benefits. The survival of stage IV non-small cell lung cancer (NSCLC) patients treated on an international trial of gemcitabine (EO-18) was used to estimate the potential survival gain relative to the survival of stage IV NSCLC patients managed with best supportive care on a randomized trial conducted by the National Cancer Institute of Canada (BR 5). Sensitivity analyses were performed assuming that the survival gain was 25% or 50% less than that reported in the EO-18 trial. The perspective of the economic analysis is that of the government as payer in a universal health care system, and all costs are expressed in 1993 Canadian dollars. Based on the apparent survival advantage of the EO-18 trial in comparison to best supportive care, the cost per life-year gained ranged from $632 to $9,285, depending on the dose per treatment cycle. At the highest dose per cycle (2,000 mg/m2) and with survival reduced by 50% as compared with the EO-18 result, the cost per life-year gained was estimated to be $17,390. From these estimates of direct care costs in the Canadian health care system, gemcitabine appears to be a cost-effective intervention for advanced NSCLC.