OBJECTIVES: Regional variation in Medicare prescription drug spending is largely driven by the use of expensive brand-name drugs vs. cheaper generic drugs in some areas. We examined the relationship between Part D cost sharing and regional variation in use of generic drugs overall and in a widely used drug class: statins. METHODS: Data were from a 10% random sample of Medicare beneficiaries in 2009. We assigned beneficiaries to 306 hospital-referral regions (HRRs). Our outcome measures, constructed at the HRR-level, were the share of prescriptions filled for generic drugs, overall and for statins. Key independent variables were the absolute dollar difference for the mean copayment between a brand-name drug and a generic drug (standardized to a 30-day supply). All estimates were adjusted for the demographic and health status differences. Spatial lag models were used for estimation in order to account for spatial autocorrelation of HRR-level. RESULTS: The share of all prescriptions filled for generic drugs ranged across HRRs from 59.1% to 80.3% for drugs overall, and from 43.8% to 84.2% for statins. The copayment difference between brand-name and generic drugs ranged from $28.9 to $58.0 for drugs overall and from $28.0 to $33.7 for statins. Controlling for all other covariates, the copayment difference had a strong positive association with share of prescriptions filled for generic drugs overall (coefficient: 0.19; p<0.05) and for statins (coefficient: 0.81; p<0.01). CONCLUSIONS: Regions with Part D plans that had a larger differential in cost-sharing between generic and brand-name drugs had higher rates of generic drug use than regions where plans had smaller cost-sharing differences. Increasing the cost-sharing difference between generic and brand-name drugs could be an effective way to encourage greater use of less-expensive generic drugs in high-cost regions. This change in benefit design could generate substantial savings for the Medicare program and for beneficiaries.