OBJECTIVE: Mandatory generic substitution of prescribed drugs aiming to moderate the cost increase of pharmaceuticals within the pharmaceutical benefits scheme, PBS, was introduced in October 2002. The study aims to investigate if the introduction of generic substitution had an impact on the development of drugs costs in Sweden for prescribed drugs within PBS and in total. METHODS: Data on the sales of pharmaceuticals to each county council and to the country in total was obtained. Data comprised both total sales (prescriptions, hospitals sales and over the counter sales) and sales of prescribed drugs within the PBS was used for the period January 2000 to May 2005. Expenditure data was expressed as retail prices excluding VAT per 1000 inhabitants in Swedish krona (SEK). Interrupted time series analysis was used to investigate effects related to generic substitution. RESULTS: The county councils' total cost for pharmaceuticals increased from 230 SEK/inhabitants in January 2000 to 280 SEK/inhabitant in May 2005. The county councils' average monthly costs for PBS pharmaceuticals lay in three segments one had a constant cost of ~40 SEK/inhabitant over the study period, the second segment increased from ~140 SEK/inhabitant in 2000 to ~170 SEK/inhabitant in late 2002 where it stabilized and the third segment ~190 SEK/inhabitant in 2000 and increased to ~210 SEK/inhabitants in late 2002 and after that it was constant. Generic substitution was associated with reduced the slope of increase of costs for drugs within the PBS for the whole country and several of the county councils according to preliminary analyses. This was also seen for several of the county councils' total costs immediately after the introduction of generic substitution. CONCLUSIONS: Preliminary analyses show that generic substitution had an impact in the pace of increase of pharmaceutical expenditures.