OBJECTIVES: This research determines the effects of higher brand and generic drug copays on drug utilization, the price elasticity of drug demand in a commercially insured population. METHODS: Drug utilization variables and health status indicators are computed separately for each full year of enrollment under a specific copay structure. Fixed effect estimation is performed with the first difference estimator to obtain the marginal effect of copay change on net drug cost and number of prescriptions. Data were provided by a major West Coast pharmacy benefit management company. The sample consists of all insurance claims for employees, their spouses, and their dependents, under age 65, who were enrolled continuously for two years. Enrollees worked in a small California firm – a firm with 2-50 employees – that offered only one health plan. The final sample has 30,824 enrollees working in 4,554 small firms. RESULTS: Higher generic drug copay leads to a reduction in number of prescriptions (-0.23; p<0.0001) and total net cost to the insurer (-$7.06; p<0.0001). Higher brand copay only results in lower total net cost to the insurer (-$2.5; p<0.0001). The generic price elasticity for total net cost is -0.16, and brand price elasticity for total net cost is -0.11. CONCLUSION: Enrollees decrease their drug use when faced with higher copays and health plans can significantly reduce their outlays on drugs by raising drug copays