OBJECTIVES: Iceland was the first Nordic country to liberalise its drug distribution system, in March 1996. Subsequent regulation in January 1997 increased patients' share of drug costs. The objectives of this study were to test the assumptions that liberalizing community pharmacy ownership would lower reimbursement costs for the state's Social Security Institute and that increasing patient charges would reduce use and, therefore, lower the cost to the Institute.

METHODS: Based on the assumptions, we built and tested two models using interrupted time series designs that contrast the monthly reimbursement costs before and after the legislation and regulation took effect. A control variable (the number of office visits to general practitioners) was tested to assess other events in the health care arena. Monthly data on these variables were provided by the Icelandic State Social Security Institute for January 1993 to August 1998 for reimbursement costs and to December 1998 for office visits to general practitioners.

RESULTS: Reimbursement costs have risen steadily throughout the period under study. The interrupted time series analysis did not show a substantial effect from the legislative change in March 1996 or from the regulatory intervention in January 1997.

CONCLUSIONS: The main argument used for liberalizing community pharmacy ownership in Iceland was built on false assumptions regarding the effect on drug reimbursement costs to the state. It will be necessary to find more promising interventions to halt the rapidly increasing cost of drugs.