OBJECTIVE: We study how a restrictive drug formulary affects physician prescribing behavior by focusing on PacifiCare (and its PBM subsidiary Prescription Solutions) in California, specifically its adoption of a 2-drug formulary for the proton pump inhibitor (PPI) class in 2000. METHODS: We use IMS Health's Xponent PlanTrak database that reports physician monthly prescribing patterns between October 1999 and September 2001. Over 10,000 physicians accounting for 84.5% of all PPI prescriptions in California are separated into four mutually exclusive groups by PacifiCare share of physician practice (zero, under 10%, under 20%, and above 20%). For each physician group, we report monthly changes in the two preferred drugs' market share within and outside PacifiCare before and after its drug formulary change. RESULTS: Compliance with the 2-drug PPI formulary was high within PacifiCare and increased with PacifiCare share of physician practice. In addition, each preferred drug had a corresponding increase in market share outside PacifiCare and the increase was also positively related to PacifiCare share of physician practice. We estimate that in September 2001, spillover effects of the PacifiCare 2-drug PPI formulary are between 71% and 211% of its effect within PacifiCare. CONCLUSIONS: PacifiCare's restrictive 2-drug PPI formulary not only resulted in high physician compliance but also spilled into other health plans in California. Both formulary compliance and spillover effects increase with PacifiCare share of physician practice.