In China, 44.4% of total health expenditures in 2001 were for pharmaceuticals. Containment of pharmaceutical expenditures is a top priority for policy intervention. Control of drug retail prices was adopted by the Chinese government for this purpose. This study aims to examine the impact of this policy on the containment of hospital drug expenditures, and to analyze contributing factors. This is a retrospective pre/post-reform case study in two public hospitals. Financial records were reviewed to analyze changes in drug expenditures for all patients. A tracer condition, cerebral infarction, was selected for in-depth examination of changes in prices, utilization, expenditures and rationality of drugs. In the two hospitals, a total of 104 and 109 cerebral infarction cases, hospitalized respectively before and after the reform, were selected. Prescribed daily dose (PDD) was used for measuring drug utilization, and the contribution of price and utilization to changes in drug expenditures were decomposed. Rationality of drug use post-reform was reviewed based on published literature. Drug expenditures for all patients still increased rapidly in the two hospitals after implementation of the pricing policy. In the provincial hospital, drug expenditures per patient for cerebral infarction cases declined, but not significantly. This was mainly attributable to reduced utilization. In the municipal hospital, drug expenditure per patient increased by 50.1% after the reform, mainly due to greater drug utilization. Three to five fold higher drug expenditure per inpatient day in the provincial hospital was due to use of more expensive drugs. Of the top 15 drugs for treating cerebral infarction cases after the reform, 19.5% and 46.5% of the expenditures, in the provincial and municipal hospitals, respectively, were spent on drugs with prices set by the government. A large proportion of expenditures for the top 15 drugs, at least 65% and 41% in the provincial and municipal hospitals, respectively, was spent on allopathic drugs without an adequate evidence base of safety and efficacy supporting use for cerebral infarction. Control of retail prices, implemented in isolation, was not effective in containing hospital drug expenditures in these two Chinese hospitals. Utilization, more than price, determined drug expenditures. Improvement of rational use of drugs and correcting the present incentive structure for hospitals and drug prescribers may be important additional strategies for achieving containment of drug expenditures.