OBJECTIVE: To quantify the relative and absolute importance of different factors contributing to increases in per capita prescription drug costs for a population of Canadian seniors. DATA SOURCES/STUDY SETTING: Data consist of every prescription claim from 1985 to 1999 for the British Columbia Pharmacare Plan A, a tax-financed public drug plan covering all community-dwelling British Columbians aged 65 and older. STUDY DESIGN: Changes in per capita prescription drug expenditures are attributed to changes to four components of expenditure inflation: (1) the pattern of exposure to drugs across therapeutic categories; (2) the mix of drugs used within therapeutic categories; (3) the rate of generic drug product selection; and (4) the prices of unchanged products. DATA COLLECTION/EXTRACTION METHODS: Data were extracted from administrative claims files housed at the UBC Centre for Health Services and Policy Research. PRINCIPAL FINDINGS: Changes in drug prices, the pattern of exposure to drugs across therapeutic categories, and the mix of drugs used within therapeutic categories all caused spending per capita to increase. Incentives for generic substitution and therapeutic reference pricing policies temporarily slowed the cost-increasing influence of changes in product selection by encouraging the use of generic drug products and/or cost-effective brand-name products within therapeutic categories. CONCLUSIONS: The results suggest that drug plans (and patients) would benefit from more concerted efforts to evaluate the relative cost-effectiveness of competing products within therapeutic categories of drugs.