This study analyzed how the use and cost of pharmaceuticals varied by level of drug co-payment in a staff model health maintenance organization (HMO). An historical cohort design was used to study changes in drug utilization and drug costs in 19,982 continuously enrolled beneficiaries less than the age of 65. The beneficiaries initially had no drug co-payments, but experienced co-payment rates of $1.50, $3.00, and $3.00 plus other benefit changes during a three-year period. A comparison cohort of 23,164 beneficiaries was selected from the same setting who were subject to no drug co-payment during the same time period. Data on the use and cost of medications were obtained from an automated data system. Adjusted analyses for each time period controlled for age, sex, years in the Group Health Cooperative (GHC), and prior year utilization (or cost). The initial $1.50 drug co-payment was associated with a drop of 10.7% in the number of prescriptions filled relative to change in the comparison cohort. The decrease was greatest for discretionary drugs at each level of co-payment. The implementation of progressively greater levels of co-payments continued to have a significant effect on drug utilization since each co-payment level resulted in an additional reduction in drug utilization; 10.6% with the $3 co-payment and 12.0% when the $3 drug co-payment was combined with other cost-sharing provisions. Co-payments were associated with lower per capita drug costs and higher per prescription unit costs.