Four areas of cost were analyzed in the expanded capitation drug program: total program costs; drug costs, escrow account distribution, and administrative costs. Total program costs were, on average, 9% higher under capitation. Drug costs, however, were 3% lower than under fee-for-service (FFS) reimbursement. This discrepancy is probably because pharmacists were not at financial risk under the program, the capitation rates were higher than intended, there were many emergency claims, and other aspects of the research environment. Although administrative costs were large, almost two thirds of the development cost was for one-time work, which could be transferred to another state at little or no expense. One third of the total administrative costs can be attributed to complying with regulations of the Health Care Financing Administration. Significant refinement of the present capitation model may be necessary before this financing innovation is used elsewhere. Modifications might include limiting the system to nursing home patients, placing pharmacists at partial financial risk, restricting participation to pharmacies that service a large number of Medicaid eligibles, and basing capitation rates in part on the drug use behavior of cashpaying patients.