Indicative prescribing amounts, and the equivalent prescribing element of funds in the case of fund-holding practices, are now an established part of UK general practice. This paper examines the implications of variations in GP prescribing behaviour for the determination of prescribing budgets. Using regression analysis, the extent to which variations in total practice prescribing costs can be explained by factors suggested for inclusion in a weighted capitation formula is established. The results indicate that 97% of the variation in practice prescribing costs can be explained by differences in practice list size, the proportion of patients aged 65 years and over, the proportion of patients living in 'deprived areas' and whether or not the practice qualifies for 'inducement payments'. The implications of the results for budget setting are discussed. A resource allocation formula based on regression analysis of expenditures can be used to promote horizontal equity in terms of equal budgets for equal need. However, its implications for vertical equity and efficiency are more ambiguous.