Studies have individually examined the impact of copayment level changes and prescription expenditure caps on total health care service utilization and costs in managed care plans. OBJECTIVE: We examined the impact of a change in prescription benefit that included both changes in copayment levels as well as prescription reimbursement limits on health care service utilization and charges. The change in prescription benefit included a change from $200 quarterly reimbursement cap to unlimited generic coverage and $25 monthly cap in brand-name drug reimbursements with a decrease in copayment for generic drugs from $7 to $5 per prescription. METHODS: A cohort of 3116 older adults continuously enrolled in a Medicare managed care plan from January 1998 were followed up for health care service utilization and charges before and after introduction of the change effective January 1999. Multiple regression analyses were conducted to examine the impact of the prescription coverage change, after adjusting for demographic, clinical, and medication-related variables. RESULTS: Analysis of patient data in the first six months of the two years showed that the prescription benefit change was associated with a 33% decrease in prescription charges, and a 9% decrease in health care service charges. There was an increase of 5% in the health care service utilization and 9% increase in the number of prescriptions filled, but the 10% increase in the generic prescriptions, and small reduction in length of hospital stay accounted for the overall reduction in total health care charges. CONCLUSION: The change in prescription benefit with a lower brand-name cap and lower generic copayment increased the generic drug utilization and decreased total health care charges.