Effects on utilization and expenditures occurring concurrently with an expansion of coverage in the South Carolina Medicaid drug formulary were investigated. Data were collected for prescriptions, physician office visits, and outpatient and inpatient hospital visits. Data were evaluated for a cohort of 12,139 individuals who had at least one prescription claim and were continuously eligible for benefits during the two-year study. A repeated measures design was employed to control the differences between subjects. A multivariate analysis of variance was used to detect overall differences in utilization and expenditures. A priori comparisons of means were performed to detect changes in levels and rates of expenditures and utilization for each service. Increases were observed in the number of prescriptions, physician visits, and outpatient visits per person while the number of inpatient hospital admissions declined. Similarly, expenditures increased for all service areas except the inpatient hospital service. The proportion of variance explained by the formulary change was small in all service areas, but would be of practical significance because of the large number of Medicaid recipients affected. From a theoretical perspective, an association of a reduction in inpatient hospital use and expenditures following the elimination of drug formulary restrictions is particularly noteworthy. These findings support the thesis that medical care services should not be viewed in isolation but rather as a system of interrelated activities. Interventions in one portion of the system are mirrored by changes in utilization of other components. Frequently, private and public medical care programs are managed with organizationally distinct benefit budgets, which are controlled independently. In view of the results of this study, this organizational approach may lead to a suboptimal allocation of resources.