In 2003, China introduced a new community-based rural health insurance called the New Cooperative Medical Scheme (NCMS). In 2005, to assess the NCMS effects on village doctors’ prescribing behaviour, we compared an NCMS county and a non-NCMS county in Shandong Province. We collected information from a representative total of 2271 patient visits in 30 village health stations (15 per county). The average number of drugs prescribed (4.6 in the NCMS county vs. 3.1 in the non-NCMS county) and use of antibiotics (72.4% vs. 59.3%) and injections (65.1% vs. 56.3%) were high in both counties, and higher in the NCMS county. Within NCMS villages, prescribing for insured vs. uninsured patients showed a similar pattern with more drugs, antibiotics and injections for those insured. Overall, for NCMS patients, the prescription excess was about equal in value to their 20% fee discount. We conclude that over-prescribing is common in villages and worse with NCMS health insurance, raising concerns for health service quality and drug-use safety.We propose that the NCMS should be redesigned with incentives for service quality improvement. A stricter regulatory environment for doctors’ prescriptions is needed in rural China to counter irrational drug use.