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Canadians spent almost $15 billion, over $460 per capita, on prescription drugs in 2002, yet there is little published evidence regarding the nature and causes of these expenditures.The objective of this study was to describe the nature and determinants of prescription drug expenditures in Canada during a recent period of rapid expenditure inflation, 1998 to 2002.Trends in overall expenditures and investment in specific therapeutic categories are decomposed using nonstochastic index-theoretical methods.Changes in per capita expenditures on oral solid prescription drugs are attributed to the cost-impact of changes in the 6 determinants that fall into 3 broad categories: volume effects, price effects, and therapeutic choices.A majority of spending was concentrated among only 5 therapeutic classes. After adjusting for generic drug use, prices for unchanged drugs declined over the period of analysis. Increased utilization of prescription drugs explained over half of the overall increase in per capita spending. Changes in therapeutic choice also contributed to cost increases.Findings suggest that the combined affect of federal price regulations, provincial price freezes, and generic substitution policies are controlling price-related determinants of drug spending in Canada. However, the cost-impact of increased drug utilization and changes in therapeutic choices illustrate the potential pitfalls of cost-management strategies that focus primarily on prices.