This article evaluates changes in the rate of generic substitution as well as the appropriateness of such changes in dispensing behavior when the conventional fee-for-service system for reimbursement of pharmacists is replaced by a capitation system. The fee-for-service system under Medicaid usually covers ingredient costs plus a fixed professional dispensing fee. The capitation system provides a cash payment per Medicaid eligible at the first of each month, which varies by aid category and season of the year. The dispensing behavior of pharmacists in two experimental rural counties is examined during a 1-year preperiod in which the fee-for-service form of reimbursement was employed, as well as a 2-year postperiod in which capitation was used in lieu of fee-for-service payments. The results are compared with pharmacist behavior patterns in two other rural counties which remained on the fee-for-service system over the same 3-year period. The data indicate highly significant increases in both the rate of generic substitution as well as the dollar savings per substitution in the experimental counties after the institution of capitation reimbursement. Using explicit criteria, no substantial differences in the appropriateness of generic substitution were noted between the two financing schemes.