OBJECTIVES: This study sought to: 1) analyze trends in utilization of antidepressant and antipsychotic medications in Medicaid between 1995 and 1999; 2) gauge the utilization and diffusion of new generation, branded antidepressants and antipsychotics during this period. METHODS: The study was based on a time-series analysis of quarterly, state-level, Medicaid pharmaceutical claims, as administered by HCFA. Data from 45 states were suitable for analysis. RESULTS: In 1998, antidepressants and antipsychotics accounted for 9% of Medicaid prescriptions, but 19% of expenditures. From 1995 to 1998, Medicaid prescriptions for antidepressant and antipsychotic medications grew by 40% and 20%, respectively; corresponding expenditures grew by 96% and 160%. The growth rate in both prescriptions and expenditures for antidepressants and antipsychotics outpaces that observed in Medicaid pharmacy benefits as a whole by more than two-fold. In 1995, new generation antidepressants and antipsychotics accounted for 44% and 17.5% of all prescriptions for Medicaid antidepressants and antipsychotics, respectively. By 1998, these new generation drugs had accounted for 62% and 51% of all Medicaid prescriptions for antidepressants and antipsychotics. CONCLUSIONS: Antidepressants and antipsychotics account for a large proportion of Medicaid pharmaceutical prescriptions and reimbursements. The total Medicaid market for antidepressants and antipsychotics grew dramatically over this four-year period. The impact of newer antidepressants and antipsychotics on expenditures is disproportionate to the number of prescriptions for these agents. New generation antidepressants and antipsychotics have been accepted into common use within Medicaid programs. Increased Medicaid expenditures for antidepressants have been driven both by the uptake of new generation agents and by increased overall prescription volume. Increased Medicaid expenditures for antipsychotics have been driven by increased utilization of atypical antipsychotics. Utilization of new-generation antidepressants and antipsychotics varies among the states; not all states have adopted new generation agents as quickly as others.