OBJECTIVES: Many employers provide financial incentives for enrollees to switch to mail order pharmacies from retail pharmacies and to lower-cost generic drugs. We assess the effects of the introduction of an incentive-based formulary on maintenance prescription drug utilization for early retirees with chronic conditions. METHODS: We take advantage of a natural experiment where one employer introduced an incentive-based formulary and a comparison employer that did not change copayments. A monthly panel data set was created from the 1996-1997 MarketScan database representing the maintenance prescription drug experience for continuously-enrolled early retirees and spouses with at least one chronic condition (n=6165). Negative binomial difference-in-difference models were estimated to measure the effects of the benefit change. Distributed lag models were estimated to assess the extent of pre-implementation stockpiling of prescription drugs. RESULTS: Utilization of maintenance prescription drugs declined 5.5% (p<0.01) after the introduction of an incentive-based prescription drug benefit, a decline that was limited to retail pharmacy prescriptions. In contrast, mail order utilization rose 23% (p<0.001), dominated by an increase in mail order brand name prescriptions (31%, p<0.001). There was little evidence of generic substitution as the utilization of generic drugs filled in a retail pharmacy dropped 8.9% (p=0.001) and mail order generic prescriptions were largely unchanged. No evidence of pre-implementation stockpiling of brand name retail drugs was discovered, although enrollees may have anticipated the change and increased utilization of mail order brand name and retail generic drugs in the two months prior to the new benefit. CONCLUSIONS: The introduction of an incentive-based formulary had significant effects on maintenance drug utilization patterns for early retirees with chronic conditions, a subgroup that typically depends upon prescription drugs to maintain and improve health. Contrary to expectations, generic drug use did not increase. However, many enrollees switched to mail order pharmacy for brand name drugs.