Background The absence of economic evidence hinders current reforms of hospital based mental health systems in Central and Eastern Europe. We aimed to assess the costeffectiveness of care for people with chronic psychoses in psychiatric hospitals compared to discharging patients to the community in the Czech Republic. Methods We conducted a prospective study of people with chronic psychotic disorders and evaluated the impact associated with discharge into community services as compared to not discharging people from psychiatric hospitals at baseline in the Czech Republic. We measured utilization of services, health related quality of life, met and unmet needs, and global functioning using an adapted Client Services Receipt Inventory (CSRI), EQ-5D-5L, Camberwell Assessment of Need (CAN) and General Assessment of Functioning (GAF). Adjusting for baseline differences between the two groups, we assessed differences in societal costs in Euros (€) and QALYs over a year-long follow-up which we then used to estimate the incremental cost-effectiveness ratio (ICER). We conducted multiple sensitivity analyses to assess the robustness of our results. Outcomes In our base case scenario, we included 115 patients who were either inpatient or community services users at the baseline. The two groups were very similar in terms of their observed characteristics. The annual QALY was 0.77 and 0.80 in the group discharged to the community at the baseline compared to not being discharged (difference 0.03 95% confidence interval-0.04 to 0.1), but costs were €8,503 compared to €16,425 (difference €7,922, 95% confidence interval 4,371 to 11,472) such that the ICER reached over 250,000 € per QALY. This is considerably above levels that are conventionally considered to be costeffective and the estimated probability that discharge to the community was cost-effective was very high. None of the sensitivity analyses changed these results qualitatively. Interpretation This study provides economic evidence for deinstitutionalization by showing that discharge to community care is cost-effective when compared to care in psychiatric hospitals in the Czech Republic. Thus, it adds to the human rights-and clinical-based arguments for mental health care reforms in Central and Eastern Europe.