BACKGROUND: To close health disparities between Indigenous and non-Indigenous Australians, the Australian government in 2010 reduced medication copayments for Indigenous Australians living with, or at risk of, a chronic disease. Patients were registered for this incentive by their general practitioner. To assess rates of hospitalizations for chronic conditions among Indigenous Australians before and after copayment reductions. Observational time-trend study of hospitalizations for chronic conditions sensitive to medication adherence.. Indigenous persons age 15 years and older in 16 urban, regional, and remote locations. The population ranged from 40,953 in 2009 to 42,651 in 2011. Hospitalizations for diabetes, asthma, chronic obstructive pulmonary disease, hypertension, heart failure, and cardiovascular events. Approximately 22 % of Indigenous persons registered for the medication copayment incentive in the first 18 months of implementation. In areas with rates of incentive uptake exceeding 22 %, the age-standardized rate of hospitalizations for chronic conditions among Indigenous Australians declined from 103.4/1000 (95 % CI 88.8/1000 to 118.0/1000) in 2009 to 60.0/1000 (95 % CI 49.3/1000 to 70.7/1000) in 2011. In areas with below-average uptake of the incentive, we observed non-significant reductions in age-standardized hospitalization rates (from 63.3/1000 [95 % CI 52.9/1000 to 73.7/1000] in 2009 to 58.0/1000 [95 % CI 48.5/1000 to 67.5/1000] in 2011). Among Indigenous Australians, the rate of admission for acute conditions (pneumonia, influenza, urinary tract infection, pyelonephritis, and dehydration) was 38.4/1000 (95 % CI 32.4/1000 to 44.3/1000) in 2009 and 36.2/1000 (95 % CI 30.4/1000 to 41.8/1000) in 2011. Among the non-Indigenous population, we found substantially lower rates of hospitalizations and modest declines from 2009 to 2011. Though we cannot make causal inferences from the results of this study, we observed marked declines in hospitalizations for chronic conditions among Indigenous Australians following targeted reductions in medication copayments for this population. These declines were largely limited to areas with higher uptake of the copayment incentive and were not observed for admissions related to acute conditions.