Objectives: To derive indicators of quality prescribing by Australian general practitioners based on Health Insurance Commission (HIC) data and assess the influence of incomplete capture of data on under-copayment drugs on the validity of these indicators. Design: Two expert groups proposed prescribing indicators that can be derived from aggregate prescribing data, and which reflect important clinical or cost-effectiveness issues. Indicators were examined using HIC data and compared with national prescribing trends over time using Australian Statistics on Medicines. The effect of incomplete data capture on indicator interpretation was examined by stratifying GPs into five strata based on the proportion of concession card holders in their practice. Participants: Approximately 14 000 Australian GPs providing ≥ 1500 Medicare services per year. Main outcome measures: Measures of prescribing for individual GPs (based on HIC data 1993–1997). Results: Forty-three potentially useful indicators were identified. These covered a fairly narrow range of prescribing activities and many required additional clinical information for interpretation. Indicators based on prescribing rates gave a misleading picture of prescribing trends where the extent of HIC data capture changed over time. Indicators expressed as ratios that reflected choice of agent within a drug class were less affected by incomplete data capture. Conclusions: Indicators of quality prescribing can be derived from HIC data. However, indicators for under-copayment drugs that represent prescribing rates may unfairly classify doctors practising in areas of socioeconomic disadvantage or high morbidity as "high prescribers". Ratio indicators are more robust, and may be more valid prescribing measures. If HIC data are to be used to monitor the quality of prescribing, data on all prescriptions dispensed will be needed.